Dan Loeb - Trading Strategy that Made Him Billions | A mini documentary

at the age of 33 dent low was ready to start his own hedge fund the trouble is he only had three hundred thousand dollars barely enough to cover business fees loeb turned to his family for help trusting his abilities his family and friends invested three million dollars with him this is the beginning of third point one of the best performing hedge funds in america [Music] dent low was born in santa monica california in a well-connected family his great aunt was the inventor of the famous barbie doll raised by greatly educated jewish parents it was inevitable that loeb will receive the best education as well after enrolled in uc berkeley lowe became deeply interested in finance but he wanted to be close to the action and there is only one place to go after two years at uc berkeley he transferred to columbia university in new york at columbia lopes started trading stocks in his dorm room eventually making him 120 thousand dollars in profits but before he goes celebrate he lost it all in one bad trade losing that large amount of money in the 80s really had a big impact on dan loeb he realized he cannot trade the stock market like a casino there must be some kind of investing methods that generate consistent returns after graduation he became an analyst at a private equity fund warburg pincus for several years the private equity business allowed dantlope to learn the critical skills of business analysis and valuation i worked at warburg pincus and private equity i always really my real passion was always the stock market i worked at a firm called lay for equity investors in risk arbitrage and learned that craft a few years later his swish job to become a bond trader real trajectory took off when i started on the cell side at a firm called jeffries in 1991 at the beginnings of the distressed debt market the correa dent lobe had was lucrative making him over six figures a year while in his late 20s but he wanted much more he knew he could only get there by starting his own fund i used to just fantasize about starting my fund and how i would name it third point capital third point management third point investing then i scratch it out i do logos like this was like really like a dream of mine to get this thing going in 1995 he made its biggest leap and launched third point with 3.3 million dollars of capital i luckily had a good friend of mine who was a wealthy individual who promised to give me about a million for i didn't have a wealthy family but at least they were in a position you know parents aunts a few other people give me a couple hundred thousand dollars each so that was really the start of third point after making eight percent return in the first month of trading dan lowe was confident that he made the right decision and he soon came to understand that in order to make a name for himself in the hedge fund world he had to perform well both in the bear and the bull market which means producing absolute returns to accomplish that he must find a unique trading strategy to create returns that are uncorrelated to the market he decided to pursue an event-driven strategy you know we're an event-driven shop so a lot of what we're doing is risk arbitrage credit plays things like that so we're i wouldn't say market neutral but we're a little less sensitive so typically certain corporate events can cause short-term volatility in asset price events such as corporate reorganization restructuring merger acquisition and bankruptcy event-driven investors are expert in analyzing these special situations and making use of the missed pricing opportunities in his first seven years third point have made steady double-digit returns by taking advantage of short-term undervalued opportunities my time frame that i look at from an investment portfolio from an investment perspective is more like one or two years soon his stellar returns have caught the attention of large hedge fund investors dentlobe was ready to join the big league [Music] as lope kept creating serious profits more investors invested third point quickly grew to have over 100 million dollars by the end of 1999 as the size of third point grows so is the pressure to find more opportunities [Music] when your phone is small you can be more nimble and your actions don't create a lot of attention dan loeb soon discovered there was money to be made in short selling finding both value plays and shorting fads and fraudulent companies and not before long he found himself in the dawn of a major crisis driven by investments in internet-based companies between 1995 and 2000 the nasdaq market index rose 400 percent it reached a price earning ratio of 200 while the average p e ratio for the stock market has historically been about 15. dan lok knows this is his time to shine so he shorted the entire test sector i never participated in the craziness of the internet bubble but i missed the crash in fact i profited from the crash because at a certain point when i thought things were really breaking we started to short stocks and did very well and that really set the stage for for a third point to raise a lot of capital because when they saw that we made money when the market was falling apart then we attracted a lot of capital by the end of 2000 he beat the market by 26.2 percent over the next few years third point consistently beat the market as the fund grew bigger than ever coming in 2007 third point was going strong date bearing was a company that manufactures testing machinery supplies for the medical diagnostics industry in 2003 the company was in financial distress as a result its bump price was trading significantly below face value dentlobe took a bet on this company believing that a business will recover soon and just as predicted the company did come back making third point six hundred percent profit in his investment but little did lope know in just a few months the biggest financial storm would bring him to his knees over the weekend lehman brothers one of the most venerable and biggest investment banks was forced to declare itself bankrupt another merrill lynch was forced to sell itself today crisis talks around your world financial markets are way down today following dramatic developments the financial crisis brought on the worst year in third points history in september just before lehman brothers collapsed third point had about five billion dollars under management with earnings up four percent for the year it ended the year down 30 percent it was a mess i just thought god i spent 13 years building this business and you know i was i felt like it was just slipping between my fingers the organization was demoralized i had huge overhead then the redemption started coming in so we lost you know a third of our capital uh about 1.4 billion dollars in redemptions at the end of the year so i thought well you know at least i have my health dental quickly discovered although the market was in turmoil it also presented him with a lot of opportunities the ones his fund was most equipped to exploit you know february came along and we felt really good again we were up four percent the market was down 25 percent we made all these smart defensive bets we did what we're supposed to do we protected our capital during a tough time by mid 2009 there was still a lot of uncertainties in the market well i don't see how anything's changed to be honest we still have the same problems that we had before but low was more bullish than ever he felt strongly that a market should only go up from here the turning point for me was citigroup pref common exchange deal citigroup has hundreds of billions of dollars of liabilities it was insolvent for all intents and purposes but they did an interesting transaction where they exchanged preferred stock which was at the bottom of the capital structure into equity they also got a lot of government goodies guaranteeing things but it gave them the capital that combined with their own earnings power made citigroup a financially viable entity going forward he started actively buying bank debts eight months later at the end of 2009 third point was up 45 percent third point survived by 2021 dead lope has a net worth of 3.5 billion dollars and he's not hesitant to spend like a billionaire like many hedge fund billionaires he made most of his money from the feces charge by maintaining an above average returns over the years dentlobe had indeed created above average performance consistently including over 20 profit for 2020. an event-driven strategy is only applicable to those with deep knowledge on how certain companies and industries work it is also inherently speculative lucky to start it when i did with the focus that i had was was looking at parts of the market distressed debt uh special situations like spin-offs demutualizations post-ruric bankruptcies during a period where that was a it was a good strategy to be in now with a large amount of capital at his disposal dentlobe has made a name for himself as an activist investor taking stakes in many well-known brands such as yahoo and nestle a lot of these hedge funds are pursuing what's called alpha the returns above the market to do that you have to have an edge either with unique information or some kind of intervention to the company that create more value over the years dent lobe has gone through many bull and bear markets while great majority of hedge funds have died out third point has prevailed [Music] you

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Id: 9QweTNq2tOM

Length: 12min 9sec (729 seconds)

Published: Fri Apr 09 2021