(Adds details on letter, outlook for economy)
By Svea Herbst-Bayliss
BOSTON, May 1 (Reuters) - Billionaire investor Daniel Loeb said the sharp decline in the market earlier this year has given buyers a chance to step in at attractive levels, but he cautioned that the rest of the year could bring more bumpy trading.
In his quarterly letter dated May 1, Loeb said some sectors were "exhibiting bubble-licious valuations" and that the decline in "overinflated sectors" hurt but was ultimately "healthy."
Loeb, who runs the $14.3 billion Third Point hedge fund, said the U.S. economy is showing signs of picking up and that the old trading adage "sell in May and go away" may not hold this year.
As one of the hedge fund industry's most watched investors, Loeb has delivered an average annual return of 21 percent over the last 19 years, and he spelled out what has frustrated so many managers so far this year.
"Consensus positions entering this year - long Japan, long momentum, and short bonds - have all underperformed, while value and emerging markets have accelerated," Loeb wrote in the letter, which was seen by Reuters.
And markets could become more volatile at the end of the year as the Federal Reserve's easy money policy gives way to speculation about when interest rates will be raised. "We will have to buckle our seat belts for an inevitably more volatile environment," he said.
In the first three months of 2014, the Third Point Partners LP fund gained 3.5 percent, outpacing the Standard and Poor's 500 Index's 1.8 percent increase.
Corporate credit and mortgage investments helped the firm earn roughly half of its returns. Ally Financial Inc, Dow Chemical Co, Sony Corp and Cheniere Energy Inc were the firm's biggest stock winners in the first three months of 2014. SoftBank Corp, Sotheby's FedEx Corp and a Japanese macro bet were its biggest losers.
He spent a chunk of the letter urging Dow Chemical's management to do more to boost earnings.
Loeb has long been praised for finding investments around the world in all types of asset classes, and on Thursday he discussed Japanese mid-cap stock IHI Corp, which is involved in commercial aerospace, automotive fuel efficiency and Abenomicsled real estate reflation in Tokyo.
He said the company is worth more than its 1,000 yen share price and that earnings could be boosted if the company focused more on "high return segments," moving away from its "suboptimal conglomerate structure of the past." (Reporting by Svea Herbst-Bayliss; Editing by David Gregorio and Steve Orlofsky)