Third Point's Q2 letter reveals the AI momentum unwind that forced leveraged selling, sent semis down 30%, and reset positioning. The fund sees a more attractive risk/reward now.
Third Point's flagship Offshore Fund returned 7.7% in the second quarter, but the letter to investors paints a more volatile picture beneath the surface. What began as a broad unwind in crowded AI infrastructure positions turned into forced selling, a historic momentum drawdown, and a sharp reset in leverage across the ecosystem.
Third Point said it entered the trough at its lowest net exposure of the year, averaging about 45% through the quarter. That limited downside but also capped participation in the recovery. The single-name short book continued to generate alpha, returning 5.1% net on $1.8 billion of average exposure across roughly 60 positions, even as the S&P 500 rallied 15.2%.
By late June, the unwind accelerated. The fund said U.S. TMT momentum had drawn down more than 50% from its peak, the long/short AI basket fell nearly 35%, and semiconductors dropped roughly 30%. The S&P 500, in contrast, has remained roughly flat, down about 2%. The KOSPI fell nearly 40% from its peak by July 30.
What made the sell-off unusual, Third Point wrote, is that it appeared unrelated to company fundamentals, economic data, or geopolitics. Many companies beat and raised earnings only to see their shares fall sharply. The fund traced the dislocation to a confluence of deleveraging events. That included forced selling by individual investors in leveraged ETFs and accounts, and the liquidation of the Situational Awareness Fund, a portfolio run by 24-year-old Leopold Aschenbrenner that was long a basket of AI names and short a set of AI losers, reportedly using 400% leverage. The unraveling of that book, and likely others with similar portfolios, triggered the historic momentum unwind.
Third Point called it one of its worst months of absolute and relative performance in some time, though it has recovered some of the losses since. The fund now sees a more attractive balance between risk and opportunity, with valuations normalized, leverage largely reset, and positioning less concentrated. It is running conservative gross and net exposures, reflecting a view that discipline around sizing and risk is as important as idea generation.
Third Point used the letter to detail three new or expanded positions, each with a distinct catalyst.
CRH, the Irish building materials company, has transformed from a cyclical European cement producer into a North American infrastructure compounder, the fund said. About 75% of its business is in the U.S., where it is the largest aggregates producer and road paver. Third Point pointed to its vertical integration, from rock to asphalt to paving, as a durable advantage. The fund expects infrastructure demand to remain well supported for at least three to four years, driven by the remaining half of the Infrastructure Investment and Jobs Act funding and the next federal transportation bill. The $8.5 billion acquisition of Arcosa adds 35 million tons of annual aggregates production and entry into Dallas-Fort Worth and Phoenix. Third Point said the market still values CRH as a cyclical stock rather than a vertically integrated infrastructure compounder with a 13-year streak of margin expansion.
Block, the payments company, is entering what Third Point called one of its most important transitions. Cash App has nearly 60 million monthly transacting actives, and the next chapter is deeper monetization. The key catalyst is Square Financial Services' 2025 approval to originate Cash App Borrow nationwide. The fund said the product's underwriting, based on proprietary real-time transaction data, has achieved repayment rates near 97% despite serving a customer base largely ignored by traditional banks. The economics are compelling: low incremental customer acquisition cost, high capital velocity, and a virtuous cycle of higher retention and engagement. Third Point also noted that Square's merchant business is quietly improving, and that Block has reset its cost structure by cutting headcount roughly 40% and redesigning the organization around AI. The fund believes Block could emerge as one of the more overlooked AI beneficiaries in financial services, possessing scaled distribution, proprietary data, and a founder-led culture.
Flex, the global manufacturing services company, is separating its Cloud & Power Infrastructure business into an independent public company. Third Point said the market is underestimating the quality and growth profile of the business, which designs and manufactures electrical power systems, liquid cooling products, and integrated server racks for AI data centers. Revenue is expected to grow from roughly $6 billion in 2025 to nearly $20 billion in 2027. Google is one of its largest customers, giving it exposure to the TPU accelerator program. The spin-off will be led by Flex CEO Revathi Advaiti, who previously ran Eaton's global electrical business and oversaw Nextracker's fourfold appreciation after its 2023 separation. Third Point estimates CPI could earn more than $7 per share by 2028 and said the separation could unlock significant shareholder value.
Third Point's credit portfolio returned 5.6% gross and 4.0% net in the quarter, bringing year-to-date returns to 6.0% gross and 3.9% net. The fund expects spreads to trend wider and be subject to greater volatility in the near term, citing several technical and fundamental factors. Massive new issuance for AI infrastructure construction, a leverage loan market dominated by CLOs with limited baskets for CCC credits, and a record 25% of the market maturing over the next three years all point to pressure. The fund sees particular risk in software, housing, building products, food, supermarkets, and cable sectors. It does not expect a near-term credit cycle but said the market is overdue for a meaningful move wider in spreads.
Structured credit returned 1.1% gross and 0.4% net for the quarter. The fund is constructive on its core mortgage exposure given the high single-digit current yield and self-amortizing profile. It sees potential buying opportunities in data center ABS if the AI equity retracement continues, but expects limited widening given the long-duration capital seeking investment-grade profiles.
Third Point also announced two new hires: Bill Gerding as a Director, Special Situations Senior Analyst, from Barclays, and Amanda Harris as a Vice President at TP Birch Grove, from LuminarX Capital Management and HPS Investment Partners. Harris previously worked at Ares Management, which carries an AlphaScala Alpha Score of 47 (Mixed) on its stock page.
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