Third Point Q1 2025 Investor Letter

Theme and Background

This chapter is the opening section of Third Point’s first-quarter 2025 investor letter. It primarily reviews the flagship Offshore Fund’s Q1 performance (-3.7%) and outlines the market environment’s shift from early-year optimism over the Trump administration’s deregulation and business-friendly policies to a sharp deterioration by quarter-end due to the "Liberation Day" tariff shock. The author emphasizes that, although the government recently appears to be moderating some aggressive tariff targets, the slowdown in transactions, financing, and overall economic activity persists.

Core Thesis

The author’s core investment argument is that, amid high trade policy uncertainty and heightened market volatility, proactively reducing risk exposure and pivoting toward event-driven strategies is the optimal approach. Counterintuitive judgments include: 1) Despite the fund’s negative Q1 returns, the author believes its net loss is smaller than that of the S&P 500, and by taking profits at highs and rebuilding positions at lows, the fund has reserved "dry powder" for subsequent deployment; 2) The author is optimistic about the merger between U.S. Steel and Nippon Steel, arguing that its industrial logic and "America First" reindustrialization plan will drive the deal to completion, contrasting with widespread market concerns over regulatory hurdles.

Key Arguments and Data

• Performance Comparison: The Offshore Fund posted a Q1 return of -3.7%, underperforming the CS HF Event-Driven Index (+0.7%) and the MSCI World Index (-1.7%), but outperforming the S&P 500 Index (-4.3%).
• Trading Record: The fund took profits on Meta and Apollo at highs, then rebuilt its Apollo position at the March lows; from Q1 to Q2, the fund reduced total and net exposure to multi-year lows.
• Top Five Winners: Meta Platforms, Rolls-Royce Holdings, Intercontinental Exchange, Phoenix Holdings, Telephone and Data Systems.
• Top Five Losers (Excluding Hedges): Pacific Gas and Electric, TSMC, Carvana, Amazon, Danaher.
• Credit Markets: Q1 corporate credit portfolio gross returns edged up, but net returns fell approximately 30 basis points; after "Liberation Day," markets experienced the most severe sell-off since the COVID-19 pandemic.
• Historical Reference: Since 2008, the author has experienced five major market dislocations. Excluding the post-financial-crisis period with returns exceeding +100%, the average two-year compound gross return after these sell-offs was +52% (net return 45%).

Companies/Assets Involved

Company/Asset	Role and Key Data	Bullish/Bearish
Meta Platforms	One of Q1’s top five winners; the fund took profits at highs	Bullish (partially realized gains)
Apollo Global Management	The fund took profits at highs, then rebuilt positions at the March lows	Bullish
U.S. Steel	The fund holds a significant position, expecting the merger with Nippon Steel to close	Bullish
CoStar Group	The fund has reached a settlement with the company, pushing for board reform and capital allocation optimization; core business EBITDA has grown at a 20% CAGR over the past decade, but Homes.com’s annual investment of nearly $1 billion (cumulative over $3 billion) has reduced combined EBITDA by approximately 80%	Bullish (expects EBITDA to grow more than 7x in the coming years)
Pacific Gas and Electric	One of Q1’s top five losers	Bearish (or position impaired)
TSMC	One of Q1’s top five losers	Bearish (or position impaired)
Carvana	One of Q1’s top five losers	Bearish (or position impaired)
Amazon	One of Q1’s top five losers	Bearish (or position impaired)
Danaher	One of Q1’s top five losers	Bearish (or position impaired)

Investment Implications

For investors, specific directions in the current environment include: 1) Reduce market-sensitive positions, particularly in technology and consumer sectors, and pivot toward event-driven, activist, and risk arbitrage strategies, as their catalyst-driven nature offers greater resilience in volatile markets; 2) Focus on dislocation opportunities in corporate credit, especially credit bonds heavily held by high-leverage multi-manager platforms, which may offer buying opportunities during panic selling; 3) Pay attention to fixed-rate residential mortgages in structured credit, as the author believes that rising rates benefit such assets, and the current increase in volatility may create new thematic opportunities.

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Third Point Offshore Fund returned -3.7% in Q1, with an annualized net return of 13.0%, outperforming the S&P 500 (-4.3%) and the MSCI World Index (-1.7%), but underperforming the CS HF Event-Driven Index (0.7%).

Theme and Background

This chapter focuses on the investment rationale for U.S. fixed-rate residential mortgage loans as a credit defensive asset class. Against the backdrop of heightened market volatility driven by trade policy uncertainty, the author analyzes tiered opportunities in the credit market and emphasizes that U.S. residential mortgage loans remain attractive amid widening credit spreads due to their high equity buffers and fixed-rate characteristics.

Core Thesis

The author argues that U.S. fixed-rate residential mortgage loans serve as a credit defensive asset in the current environment. Even if home prices decline by 20%, the loan-to-value ratio would remain at approximately 62.5%, providing ample buffer against potential defaults. Meanwhile, subprime consumer credit (e.g., subprime auto loans) will continue to deteriorate, but the fund has already avoided related risk exposures. Additionally, trading opportunities in the credit market are emerging, particularly in CLO (Collateralized Loan Obligation) mezzanine tranches, where yields have risen to high single digits to low double digits, potentially creating buying opportunities due to structural selling pressure in the future.

Key Arguments and Data

• Defensive Nature of Residential Mortgage Loans:
• Borrowers hold an average of over 50% home equity and are locked into fixed rates, reducing interest rate volatility risk.
• If home prices fall by 20%, the loan-to-value ratio would still be approximately 62.5%, well below default trigger thresholds.
• Fed rate cuts or a range-bound Treasury yield environment (even with widening credit spreads) could drive mortgage loan prices higher.
• Deterioration in Subprime Consumer Credit:
• Subprime auto loan borrowers from 2021-2022 purchased vehicles at high prices and began strategic defaults in 2023 due to refinancing difficulties.
• Declining savings rates combined with rising unemployment have exacerbated subprime consumer vulnerability.
• The fund has avoided subprime auto loan exposure, with subprime unsecured and credit card exposures held only as loans or in senior parts of the capital structure.
• Trading Opportunities in the CLO Market:
• In March 2025, CLO mezzanine tranche yields rose to high single digits to low double digits (previously low single digits).
• Loan prices fell several points from par, with more distressed loans dropping 10 points; if loan prices fall below $80 or ratings drop below CCC, CLOs must be marked to market, potentially triggering selling pressure.
• Historical comparison: During the 2016 oil price crash, CLO BB tranches fell 20-30 points within weeks, later creating a buying opportunity with a two-year mid-cycle return of 15%.

Asset Class	Current Status	Key Data	Investment Judgment
U.S. Fixed-Rate Residential Mortgage Loans	Defensive Asset	Average home equity >50%; LTV ~62.5% after 20% price decline	Bullish, provides buffer when credit spreads widen
Subprime Auto Loans	Deteriorating	Increased strategic defaults in 2023; declining savings rates	Bearish, fund has no exposure
CLO Mezzanine Tranches	Trading Opportunities Emerging	Yields rose to high single digits to low double digits; loan prices fell several points from par	Bullish, waiting for further price declines before buying

Companies/Assets Involved

• Birch Grove: A diversified credit asset management company acquired by Third Point in February 2025, bringing over $8 billion in capital and focusing on seasoned CLOs, private credit, and other strategies. Post-integration, Third Point Private Credit was established, with plans to launch an insurance-dedicated vehicle and an SEC-registered strategy in Q2 2025.
• Malibu Re: Third Point's life and annuity reinsurance company, serving as part of a diversified solution.

Investment Implications

• Increase allocation to U.S. fixed-rate residential mortgage loans: Leverage their high equity buffers and fixed-rate characteristics as a defensive allocation when credit spreads widen.
• Avoid subprime consumer credit: Particularly subprime auto loans, given rising default risks and depleted refinancing channels.
• Monitor structural opportunities in the CLO market: When loan prices fall below $80 or ratings are downgraded, the mark-to-market mechanism for CLOs may trigger selling pressure, offering buying opportunities for tactical investors (e.g., Third Point), similar to the mid-cycle high returns following the 2016 oil price crash.
• Leverage private credit integration advantages: Through Birch Grove's CLO analytical capabilities and private credit team, seek current income and risk-adjusted returns in middle-market direct lending and capital solutions.