By Nell Mackenzie
LONDON (Reuters) - Billionaire investor Daniel Loeb has reduced the size of short bets on single named companies to limit the vulnerability of his hedge fund, Third Point, to short squeezes, he said in a letter on Tuesday.
"The short-selling environment is much more challenging than it has been historically," said Loeb in the letter. Analysing a company's economic prospects has taken a backseat to watching Reddit message boards and options expiries, the letter said.
A short squeeze occurs when a stock price rises so much that bearish bets become too expensive to hold and investors are forced to buy them back, sometimes at a loss.
Loeb, who runs Third Point - which had around $12.6 billion in assets under management at end-February - said his top five winners this quarter included utility Pacific Gas and Electric, tech companies Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) as well as and plumbing and heating product Ferguson.
Loeb said his worst-performing stocks for the quarter were the tech Alibaba (NYSE:BABA) Group Holding, bioprocessing company Danaher (NYSE:DHR), Catalent (NYSE:CTLT), International Flavors & Fragrances (NYSE:IFF) and an undisclosed private position.
The nine companies did not immediately return a request for comment.
The Third Point Offshore Fund returned 1.1% for the quarter but was still down 3% for the year through June 30, according to the letter.
Almost half of Loeb's net long exposure includes companies that will benefit from developments in artificial intelligence, the letter said.
AI will need more plumbing to power programmes like Chat GPT4 as it gets better at gathering and learning on data and then, spitting out answers, the letter said.
This will benefit the biggest providers of cloud-based software which outsource servers and storage like Microsoft Azure, Amazon Web Services, and Google Cloud Platform, it said.
Elsewhere at Third Point, Loeb's corporate credit team returned a net 8.7% for the quarter after market instability in the March banking crisis created opportunities for the fund, Loeb said.
Loeb's residential mortgage and structured credit portfolios are both up a net 3.2% and 4.1% for the year so far, the letter said.