Hedge fund star Dan Loeb’s firm says that many investors — including themselves — were too optimistic at the start of the year, and that we are now headed for a volatile environment in which fundamentals will drive the market.

Third Point said in a first-quarter letter to clients that key sectors were showing “bubblelicious valuations” in the quarter and were poised for more volatility in the months ahead, according to CNBC.com. But it also said the recent pullback was healthy, and said the economy was beginning to accelerate after interest rate hikes and bad weather led to a slowdown.

“It now seems evident that investment performance will require a combination of good stock selection, patience, and deft trading,” the firm said. “As tapering ends, most likely in October, and the discussion shifts to an impending first rate hike…we will have to buckle our seatbelts for an inevitably more volatile environment.”

Loeb’s firm added that it is adding to its mortgage backed security holdings and is looking to purchase European bank assets.