A "much more challenging" short-selling environment has prompted activist hedge funds Third Point to cut back on the number of single-name short positions it holds in its portfolio, according to a report by Seeking Alpha.

The report cites Third Point CEO and Chief Investment Officer Dan Loeb as writing in an investor letter sent to clients this week that: "While we have not abandoned short selling, we continue to reduce our single name short exposure in favour of market hedges and short baskets."

The firm has also reduced the position sizes of single short names, "limiting our vulnerability to short squeezes," Loeb wrote.

Third Point's Offshore Fund, which recorded a 1.1% Q2 gain, is down 3% so far this year.