By Svea Herbst-Bayliss
BOSTON (Reuters) - Billionaire investor Daniel Loeb has told clients his firm has taken more defensive bets in the face of tumbling markets by dramatically increasing its short positions, which helped Third Point avoid "calamitous" losses last year.
The fund manager also said the firm cut stakes in companies that were exposed to China and commodity prices, which have fallen sharply.
"A renewed focus on generating alpha on both sides of the portfolio has led us to increase single-name equity shorts by four-fold over the past year. Our total equity short exposure is nearly $4.5 billion today," Loeb wrote in a letter to clients dated February 12 and seen by Reuters.
Loeb, whose $17.5 billion hedge fund has delivered an average return of 16.2 percent a year over the last two decades, did not mince words in his assessment of tumbling markets.
"The indices' drastic declines actually fail to capture the true carnage revealed when you take a closer look at the breadth of S&P companies experiencing massive losses," he wrote.
Loeb was among the first big name fund managers to say that he was putting on new short bets last year, a decision he said on Friday helped his clients preserve capital. The fund lost 1.4 percent in 2015, far less than rivals David Einhorn and William Ackman who each lost roughly 20 percent. The S&P 500 ended 2015 with a 1.4 percent gain.
He blamed a sell-off in high yield credit markets, jitters about lower growth in China, plus what he called "incoherent" statements from U.S. central bankers for exacerbating markets' fears. And he said "a rise of populism in the Presidential race is creating further uncertainty."
For now, Loeb said the trouble is confined mostly to Wall Street, but he warned that if it hits Main Street and Americans cut back on spending, "the economic picture in the U.S. becomes grim."
In turn he has reoriented his portfolio, noting that his credit team and his stocks teams are betting on more declines.