We are in the 'first inning of a 'wash out' in hedge funds, top fund says

Iran Missile Test

Hedge funds are getting killed, says hedge fund manager Dan Loeb.

Loeb's Third Point Capital put out its quarterly letter to investors on Tuesday, calling the first three months of 2016 "one of the most catastrophic periods of hedge fund performance that we can remember since the inception of this fund."

Third Point was down 2.3 percent during the first quarter, which compares to a 1.3 percent gain for the S&P 500 over the same period. (As bad as that may be, though, it could have been worse — Bill Ackman 's Pershing Square was down more than 25 percent in the quarter.)

Despite the weak performance, Third Point believes it is positioned to do well the rest of the year.

"There is no doubt that we are in the first innings of a washout in hedge funds and certain strategies," Third Point said. "We believe we are well-positioned to seize the opportunities borne out of this chaos and are pleased to have preserved capital through a period of vicious swings in treacherous markets."

"Volatility across asset classes and a reversal of certain trends that started last summer caught many investors flat-footed in Q1 2016," the firm added.

More specifically, Loeb said:

  • China is all over the map.
  • Hedge funds were long the "FANG" stocks — Facebook , Amazon , Netflix , and Google — and those stocks are not doing well.
  • "The Valeant debacle in mid-March decimated some hedge fund portfolios." (The stock lost almost three-quarters of its value during the quarter).
  • The collapsed Pfizer -Allergan deal hurt investors.
  • A "huge asset rotation" into a "market neutral" strategy.
  • He thinks the dollar has peaked, and oil has hit a bottom.

"We believe that the past few months of increasing complexity are here to stay and now is a more important time than ever to employ active portfolio management to take advantage of this volatility," Loeb concluded.

As an industry, hedge funds bounced back in March after a miserable start to 2016. The HFRI Fund Weighted Composite Index gained 1.8 percent in March, its strongest performance since February 2015.

However, hedge funds saw investor redemptions in the first quarter. Investors withdrew $14.3 billion, leaving total assets under management at $3.1 trillion, according to industry tracker Preqin.

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