A Wall Street fox hunts at Owl Creek

NEW YORK (Reuters) - When healthcare stocks plunged 12 percent last quarter, Jeff Altman of Owl Creek Asset Management snapped up more than $300 million worth of them.

Altman, a deep value-focused investor, purchased nearly $140 million in Pfizer Inc (PFE.N) and an additional $25 million in Cigna Corp (CI.N), currently the largest equity holding at Owl Creek's $6.3 billion portfolio, recent U.S. regulatory filings show.

Although it remains to be seen if those bets will pay off, Altman's record of pouncing on perceived bargains has yielded enviable gains at Owl Creek since he founded the firm in 2002.

Owl Creek's Overseas Fund has posted net annualized returns of about 16 percent a year since its inception, versus gains of 2 percent for the S&P 500 index. In 2008, when the S&P 500 tumbled 37 percent due to the global financial crisis, the fund held its losses to less than 10 percent.

This year, through mid-August, the fund stood at about break-even, slightly outperforming the S&P 500. (For a graphic on Owl Creek's performance and holdings, see link.reuters.com/jyt86n.)

Altman's pretty returns have been matched by a pretty face. The 43-year-old fund manager was anointed by New York magazine in June as one of Wall Street's "foxes of finance." (And he's still a bachelor, a spokeswoman confirmed.)

But even foxy investors have found the hunting grounds in world stocks difficult.

Despite recent sell-offs, Altman has seen fewer bargains in the market. Consequently, he has been shrinking his portfolio to include only high-conviction trade ideas.

"In the current environment, we are cautious on the economy and the markets, and it causes us to want to maintain a defensive portfolio," Altman wrote in a recent letter to his investors. He also painted a grim picture of the U.S. jobs market.

In the second quarter, he completely got rid of some financial stocks such as JPMorgan Chase & Co (JPM.N) and Royal Bank of Scotland Group Plc (RBS.N), as well as Kraft Foods Inc (KFT.N) and Motorola Inc MOT.N.

The value of Owl Creek's U.S. equity portfolio fell to $3.4 billion on June 30, less than half the $7.9 billion recorded at the end of the first quarter, filings with the U.S. Securities Commission show.

Altman declined to comment for this article.

FOR NOW, SHEDDING RISK

Altman's move to take risk off the table serves as a bad omen for the market. If anyone, he has large experience in finding value in distressed assets.

He started his career in 1985 working for legendary investor Michael Price at Heine Securities, the former adviser to the Mutual Series family of funds. He specialized in bankruptcies and distressed assets.

He has also worked in many of the company restructurings of the past two decades, including those of Loewen Group, Eurotunnel and Mercury Finance.

In 1996, when Price decided to sell his company to Franklin Resources for nearly $700 million, becoming one of the 400 richest people in America, Altman was one of the few to partner in the transaction.

For the next five years, he worked for the newly merged Franklin Mutual Advisors as manager of a portfolio of distressed securities worth more than $2.4 billion.

That's when he decided to go solo, at age 35. He founded Owl Creek Asset Management in June 2001 with a humble $17 million under management, $7 million of which belonged to Altman himself, according to HFMWeek magazine.

Owl Creek's assets grew exponentially in the next few years, and so did Altman's income.

In 2007, he took home between $75 million and $100 million and stood among the 100 highest paid Wall Street fund managers, the extinct Trader Monthly magazine reported.

'FUNDAMENTALS WILL MATTER AGAIN'

Altman's strategy on healthcare stocks is a risky one, as there are still uncertainties about the impact of healthcare reform on insurers' costs.

He believes, however, that the risk-reward proposition cannot be ignored.

"The market is mispricing the risks in these stocks and providing us the opportunity to own good businesses at depressed valuations," he said in his letter to investors.

Altman's bottom-up strategy of picking good companies at distressed prices has also been challenged by persistent equity sell-offs that make it difficult to call a market bottom.

He admits that in uncertain times like these, "it is painful to be investing against the grain," but says macro concerns or market technicals won't dictate his way of looking forward.

"Fundamentals will matter again one day, as they always have and always will. Our time-tested strategy of doing the work to find value will once again prove to be the right one," he said in the letter to investors.

(Reporting by Walter Brandimarte; editing by John Wallace)