Third Point rues miscalculation over market ‘mayhem’ in Argentina

Third Point rues miscalculation over market ‘mayhem’ in Argentina

24/10 - 12:35 - Hedge fund founded by Dan Loeb was hurt by big swings after August primary election

Ortenca Aliaj and Colby Smith in New York and David Keohane in Paris

Daniel Loeb is licking his wounds after misjudging “mayhem” in Argentina following the emphatic defeat handed to incumbent Mauricio Macri during the country’s primary elections in August.

In a letter to investors on Thursday, the founder and chief executive of Third Point Management said he had expected Mr Macri to lose by a small margin in August but to prevail in the general elections taking place this Sunday — a contest leftwing Peronist candidate Alberto Fernández is expected to win by a wide margin.

In the aftermath of the primary election results, Argentina’s peso plummeted against the US dollar and the country’s dollar-denominated bonds sunk. The intense volatility forced Mr Macri to take on a number of emergency measures to stem the panic, including capital controls. He also announced that the government sought to defer payments on portions of its $101bn of debt, of which $50bn is mostly owned by foreign investors.

Third Point’s holdings of Argentine sovereign debt were its biggest losers over the first nine months of the year, according to the letter. The fund managed $14bn of assets at the end of last year, according to filings.

“In failing to anticipate the extent of Macri’s loss in the primary election, our most significant mistake was missing the second-order thinking that in such a scenario, Argentina would be rudderless for almost three months between the August primary and the October election and economic mayhem could ensue,” the letter said.

When negotiations with creditors begin, Mr Loeb said he expects investors to recoup as much as 50 per cent more than current prices imply. As it stands, most of the country’s dollar bonds are trading around 45 cents on the dollar, meaning the billionaire investor sees recovery values above 60 cents on the dollar.

Several of Argentina’s bondholders left private meetings with IMF officials and associates of Mr Fernandez discouraged last week, bracing themselves for steep losses when the government eventually tackles its massive debt burden.

Third Point joins a host of hedge funds hurt by the August market rout, including emerging market specialists Autonomy Capital, which lost $1bn in one month, and Michael Hasenstab, the famed bond fund manager at Franklin Templeton, which lost $1.8bn in a single day.

Some EM traders managed to escape the pain by paring back their bets ahead of the August election while others bought credit default swaps, a form of insurance against a bond defaulting.

Third Point said it had realised “significant profits” from its Argentina trades back in 2016 with a bullish bet on government bonds and Argentine equities.

In the letter Third Point also disclosed a roughly $700m stake in eyewear company EssilorLuxottica, which has been riven by a governance battle between its French and Italian partners.

The letter said the group is currently “challenged by a poor corporate governance framework” and that a “deadlocked board and management team has slowed integration and strategic decision making. “The letter called for the company to “accelerate leadership transitions and delineate a timely merger strategy”.