Third Point’s Loeb Joins Dalio on ‘The Short Side’: “Companies Are Going Down”

The comments below are an edited and abridged synopsis of an article by Tyler Durden

We have warning words from another billionaire hedge fund manager as expectations of further market disruptions loom.

After the largest hedge fund in the world shifted to a net short equities position (Ray Dalio’s Bridgewater), Dan Loeb’s Third Point dramatically increased its short bets. Billionaire Loeb wrote in his letter to investors last week :

“Market shifts are inherently difficult to anticipate and when they happen, they do not ring a bell but they do blow a dog whistle, as we have said in the past. Our job is to listen carefully and to take decisive action when we suspect change is afoot. We believe that the increase in our short book and our reduced net and gross reflect what we are hearing.”

On an earnings call for Third Point Re., Loeb told investors that it’s a good time to have more balance on the short side, adding that he sees more opportunities to find companies that will “go down, or materially underperform the rest of the portfolio.”

Loeb said investors have become increasingly concerned about stock multiples, since after years of low interest rates, there’s finally an alternative to equities in the form of ‘relatively riskless’ 2-year Treasuries.

And while hedgers have been waiting for a return of volatility to exploit price movements after several years of calm markets, Loeb’s response has been to add to his hedge fund’s equity short portfolio.

Like Dalio, Loeb is de-risking his gross book overall, and pushing his stock positioning to the short side.

Loeb said his firm is watching to see if a recession might be closer that market believes: “…as manufacturing indices (PMIs) cool from elevated levels, there is a real question about just which inning of the late cycle we are in. While we don’t believe a recession is close, there is definitely a concern that it is getting closer.”