The activist positions Dan Loeb is so well known for have been among his Third Point hedge fund’s top five performers in 2019, but a bet on Argentina sovereign debt managed to tip it into the red for the third quarter.
“Our largest loss in the third quarter was in Argentine sovereign debt, when a surprising outcome in the August 11th presidential primary caused a panic in the capital markets,” Third Point wrote in its third-quarter letter released Thursday.
Third Point’s Offshore Fund lost 0.2 percent during the quarter but is still up 12.7 percent for the year through September, according to the letter. It said its RoA (return on assets) on equity positions was 30.1 percent — putting the magnitude of the Argentine credit losses into greater perspective. (Third Point said it also lost money on single-name shorts.)
Argentine sovereign debt became a big bet for hedge funds after the country finally settled with Paul Singer’s Elliott Management, and a few others, the so called “holdouts” who’d demanded to be repaid in full despite Argentina’s sovereign debt restructuring of 2001.
That only happened after 15 years of legal wrangling, along with the defeat of longtime populist president Cristina Kirchner, who was replaced by the market-friendly Mauricio Macri. For a while Macri’s policies seemed to work and, as Third Point noted in the letter, “Argentine credit generated significant profits for us from 2014‐2016.”
By last summer — two years after finally coming to an agreement with the holdouts — the Argentine economy was faced with a fiscal deficit, rising inflation and mounting debt obligations, leading it to ink a new credit line with the International Monetary Fund — for a staggering $50 billion.
And this summer, Argentines rebelled against the draconian economics that Macri brought, leading Kirchner (with Alberto Fernandez leading the ticket) back to power, as they won the presidential primary.
Third Point acknowledged that it miscalculated Argentine politics, even as it expected Macri to lose “by a slim margin.” The firm reckoned that even if the populist ticket prevailed, “Argentina’s economic fundamentals and Fernández’s background suggested that the draconian restructuring the market feared was unlikely.”
Instead, the huge margin by which Fernandez won in the primary led to chaos in the markets.
“Investor fears spiraled into a massive sell off in the currency and reserve depletion, making a debt restructuring inevitable,” Third Point wrote.
Third Point wasn’t the only one to miscalculate. Notably, Jim Grant of Grant’s Interest Rate Observer had gone bullish on Argentina as late as this spring, and acknowledged the error in judgment less than three months later.
Third Point said it had reduced its position in Argentine debt.
Meanwhile, the hedge fund is steaming ahead on the activist front — one place where it believes it has a key advantage against other investors, including the quants that dominate markets today.
“In a world where traditional forms of alpha are increasingly being commoditized and beta can be cheaply replicated, activism stands out as a valuable source of alpha available only to a small cohort of investors,” Third Point wrote. “Recognizing this, we created a dedicated governance team to enhance our activist idea generation and raised our second SPV this year to bring capital to a high‐conviction activist idea. Over 40 percent of our portfolio today is in activist names — our highest percentage in history.”
