Hedge-Fund Expert Loeb: Overreaction to Europe Provides Investing Bargains

Wednesday, 01 Aug 2012 10:51 AM

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Europe may be going through a crisis, but markets tend to overreact to events in the continent from time to time, leaving many assets being oversold, which make for nice investment bargains, said hedge fund manager Dan Loeb, who runs the $8.7 billion Third Point fund.

“We are often asked what ‘event-driven’ investing means in today’s environment, and whether that landscape is still fertile. We have found it to be especially so in Europe in 2012, where we have managed to make money despite the continental chaos by looking for negative events, capitalizing on dislocations they generate and trading well around these individual situations,” Loeb wrote in a letter to clients.

“While Europe overall is a place where we currently have little interest in long-term investing given the circumstances, surprisingly, many of our top winners so far in 2012 are European situations,” he added.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

Markets have tanked on fears that the European debt crisis is worsening, though they have often shot up when policymakers take steps to lower the likelihood of a Greek default and exit from the currency zone, which could pressure the larger Spain to follow suit.

“In times of turmoil, we look for ‘fat pitches’ that come from factors like forced or panicked selling, market dislocations or a move in the cycle away from greed toward fear. With all of the mayhem in Europe in the past 12 months, we have been able to find quite a few of these types of investments while remaining disciplined about avoiding anything in the region that falls outside of our very narrowly defined investment parameters,” Loeb wrote.

“With the turmoil in Europe showing no signs of abating, we expect to continue seeing these types of attractive opportunities,” he added. “We recently added a new position that fits these parameters through the European IG bond index known as iTraxx,” which consists of investment-grade European corporate debt, according to the Business Insider.

The European Central Bank (ECB) is due to address monetary policy this week, and may announce measures to spur growth, including purchasing sovereign bonds to lower borrowing costs in troubled European countries to spur more recovery.

Such a tool, similar in nature to measures carried out by the Federal Reserve, won’t spark economic growth, other experts say.

Without true fiscal reform, Europe will continue to battle building headwinds and its capital markets will suffer.

“I think there’s scope for market disappointment at this point,” said Philip Poole, global head of macro and investment strategy at HSBC Global Asset Management, according to CNBC.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

“[But] irrespective of what the Fed does or what the ECB does, it’s not going to make a big difference to this global growth picture,” Poole added.

“Markets have to come round to the idea that growth will be low…I think too much attention is focused on the short-term stimulus that could come from central banks without really much expectation, in my view, that it makes much difference to the fundamentals.”

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