Billionaire investor Dan Loeb's Third Point says it's 'difficult to call a bottom' in tech stocks and the fund is investing in shares of oil and gas firms to hedge inflation

• It's difficult to call a bottom in the tech sector, said Dan Loeb in his fund's first quarter investment letter.
• Third Point took on a more defensive posture in the quarter and found "interesting opportunities" in energy and cyclical sectors.

Third Point, the hedge fund run by billionaire investor Daniel Loeb, sees more downside in technology stocks even after the sector's steep decline into bear market this year.

The tech-rich Nasdaq Composite was under more pressure on Monday following its fifth consecutive weekly decline.

"Even after dramatic declines, it is difficult to call a bottom in the high-growth, high-valuation end of the tech sector, especially given that many of these companies relied on stock-based compensation and controversial accounting and reporting techniques," wrote the Third Point founder and chief executive in the hedge fund's first-quarter investment letter dated May 6.

"It appears that many of the companies which used this type of compensation to attract employees may have retention difficulties, leading to increased dilution for future stock grants or increased cash wages, which could weigh on margins for analysts who rely on adjusted measures rather than old-fashioned GAAP," or generally accepted accounting principles, he wrote.

The Nasdaq Composite has plummeted into a bear market, down 22% so far this year as climbing interest rates threaten to cut into the value of future profits for tech companies. The march higher in Treasury yields reflects anticipation for the Federal Reserve to issue large and swift interest rate hikes it tries to tamp down on hot inflation. The 10-year Treasury yield on Monday rose to 3.14%, pushing further into the highest rates since late 2018.

Loeb said the hedge fund adopted a "significantly more defensive posture" in the portfolio during the first quarter and in April, saying it's concerned about valuations in the current interest rate environment, geopolitical uncertainty, and emerging weakness in important global economies.

It said it's been buying energy shares, a sector whose nearly 50% jump in 2022 has trounced the performance of the broader equity market.

It's found "interesting opportunities" in energy and other cyclical shares, starting with its investment in oil major Shell PLC last fall, and its newer stake in copper and nickel miner Glencore. It increased its position in Shell in the first quarter. Third Point initiated positions in oil and natural gas and materials companies in the first quarter as it expects them to benefit from inflation, supply shortages, and the adoption of electric vehicles and other renewable sources of energy.

Energy and materials commodities will be in short supply relative to demand as a result of "ill-conceived energy policies" in most developed countries, including the US, said Loeb.

"The negative effects of these bungled policies were compounded by well-intentioned but disastrous ESG initiatives that together resulted in a dearth of new investments in the sector. These companies will largely return their cashflow to shareholders via debt paydowns, share repurchases, and cash dividends."

The S&P 500 energy sector this year has sharply outperformed the 10 other groups tracked on the S&P 500 and the index itself. It's gained 49% through early May, followed by a 0.7% gain for utilities, the only other sector that's advanced. The S&P 500 index has fallen into correction territory with a 13% decline.

Third Point's flagship Offshore Fund dropped 11.5% in the first quarter compared with the S&P 500's decline of 4.6%. In April, it lost about 1% compared with the 8% fall in the S&P 500 and the 13% drop in the Nasdaq, it said.