By Katya Wachtel

Hedge fund manager Daniel Loeb built a major position in distressed Greek government bonds in September, according to a monthly report and quarterly letter he sent to his investors.

Loeb's nearly $5 billion Third Point Offshore Fund gained 3.4 percent last month, helped by a bullish position in Greek debt, said the Sept. 30 monthly note, which was reviewed by Reuters.

The hedge fund increased its exposure to European credit through July and August, including Greek bonds, in anticipation of «a strong reaction from the ECB» to markets in turmoil from worsening debt troubles in Spain and a European Union summit that failed to calm anxious investors, Loeb said in a more detailed quarterly letter released on Wednesday and obtained by Reuters.

Third Point, which manages $9.3 billion in assets, said its holding of Greek government bonds ranks in size with the firm's stakes in Apple Inc and Murphy Oil Corp.

The hedge fund scooped up certain Greek government bonds for about 17 cents on the dollar, which were part of a so-called «strip» of 20 newly issued bonds that mostly trade bundled together, Loeb said in the October 3 letter. The individual bonds have an average maturity of about 20 years.

Loeb said markets were mistakenly pricing the debt to reflect a Greek exit from the Euro Zone, a scenario that Third Point viewed as unlikely.

"ECB Chief Mario Draghi's campaign to save the Euro began in late July, and reinforced our belief that the probability of a Greek default was overstated by the market,» he said.

Greek debt has risen in value as concern that the euro zone might collapse has eased after steps by the European Central Bank to prop-up some ailing economies. For example, the total return on 10-year Greek government bonds in September was 29 percent. The bonds Third Point bought are currently trading above 20 cents on the dollar, Loeb said in the letter.

The hedge fund manager, known for penning entertaining investors letters, quoted deceased rapper Tupac Shakur's song in the section on Greek debt, singling out the lyric, «I'm tryin' to make a dolla outta fifteen cents» from the song 'Keep Ya Heads Up.'

"While we may not achieve the over six-fold return that Mr. Shakur (Tupac) earned plying his trade, we believe the potential risk-adjusted return on [Greek Government bonds] is more favorable, particularly when adjusted for the risk of potential regulatory intervention he faced,» Loeb wrote.

Third Point has had success this year with bets on the sovereign debt of Portugal. Investments in that country's government bonds were one of Third Point's biggest winners in the second quarter.

The firm's roughly $5 billion Offshore Fund is now up almost 11 percent for the year through the end of last month, while most hedge funds rose just over 3 percent through Sept. 26, according to Bank of America Merrill Lynch. The broader stock market rose 2.5 percent last month, and has risen 16.4 percent for the year.

The New York-based hedge fund's other winners in September included its largest holding, technology company Yahoo, as well as bets on gold, Ally Financial and an undisclosed short bet.

Losing bets for Third Point during September were American International Group, Enphase Energy Inc, two short positions in technology, media or telecommunications companies and an asset-backed-security short position.

Loeb, who is one of the most closely watched hedge fund managers in the $2 trillion industry, also used the quarterly letter to vent frustration with management at Murphy Oil.

The company represents one of the hedge fund's largest holdings. Though its holding is a passive investment at this time, Third Point has applied for Hart-Scott-Rodino regulatory approval to increase its position, which would provide the hedge fund with «maximum flexibility» if talks with the board do not «bear fruit."

The Third Point Offshore Fund has provided investors with annualized returns of over 17 percent since the fund's inception in 1996. [Reuters]