&l;p&g;&l;img class=&q;dam-image getty size-large wp-image-563977569&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/563977569/960×0.jpg?fit=scale&q; data-height=&q;635&q; data-width=&q;960&q;&g; (Photo by Mark Boster/Los Angeles Times via Getty Images) January 24, 2013.
Many active managers complain about the rise of Facebook, Amazon, Netflix and&a;nbsp;Google (Alphabet) and how these soaring &q;FANG&a;nbsp;stocks&q; have made it all but impossible to beat the S&a;amp;P 500 Index. There are no such complaints coming from Jeffrey Altman of $2.4 billion in assets Owl Creek Asset Management, who beat the market in 2018 by straying far from the red hot FANG stocks.
Altman, who spoke at Forbes and Shook Research&a;rsquo;s Top Advisors Summit in Las Vegas on Thursday, gained over 21% net of fees by finding opportunity in everything from shorting Toy&a;rsquo;s R Us bonds, to going long the restructuring of casino giant Caesars Entertainment and betting against Bill Ackman in his multi-year battle&a;nbsp;with&a;nbsp;Herbalife. Altman and his co-portfolio manager Daniel Krueger hunt the world for deep value investments, finding opportunity in everything from restructurings to spinoffs, stub equities, turnarounds, and even soft activism. At any given time they use a flexible mandate to tilt their portfolio as much as 70% equities, or 70% credit.
In 2017 opportunity abounded for Owl Creek in almost every corner of the market. For instance its biggest holding was Altaba, the stub of Yahoo that holds its near 20% stake in e-commerce giant Alibaba and Yahoo Japan. That stock nearly doubled in value through 2017 as Alibaba soared and the stub&s;s discount narrowed. Owl Creek has been an opportunistic buyer during selloffs&a;nbsp;like a security scandal at Yahoo and the stub equity&a;rsquo;s exclusion from stock indices. Other big winners for Owl Creek in 2017 included a bet on the post-reorganization equity of MGM Studios, spinoff ServiceMaster, an activist effort at conglomerate Brunswick&a;nbsp;and the rise of financial stock&a;nbsp;CIT Group.
This broad canvas to find value buys is nothing new for Altman&a;rsquo;s sharp penciled team of&a;nbsp;PMs and analysts. And Owl Creek is willing to stray into controversial, news-making situations.
Soon after hedge fund billionaire Bill Ackman of Pershing Square publicly called Herbalife a pyramid scheme in 2012, Altman and his team took a position in the multi-level supplements seller&a;rsquo;s convertible debt. The firm&a;rsquo;s thesis was Herbalife&a;rsquo;s international&a;nbsp;scale meant the convertibles were money good even if its U.S. business was sanctioned. As Owl Creek did more work, including meeting with Herbalife management and becoming a distributor, to learn whether Ackman&a;rsquo;s pyramid scheme claims held water. Then billionaire &l;a href=&s;http://www.forbes.com/profile/carl-icahn/&s;&g;Carl Icahn&l;/a&g; got involved; Altman says he soon concluded Ackman was entirely wrong.
&a;ldquo;We didn&a;rsquo;t want to go against Bill at all,&a;rdquo; Altman said of his contrarian bet on Herbalife versus Pershing Square&a;rsquo;s public short. &a;ldquo;He&a;rsquo;s a good friend. What went wrong was Bill didn&a;rsquo;t do all the work that needed to be done… Bill was out making movies about why this was a fraud rather than doing the work.&a;rdquo;
Pershing Square declined to comment. It appears Ackman has all but exited his Herbalife short, with the stock having doubled and costing his fund hundreds of millions of dollars. The Federal Trade Commission did sanction Herbalife, forcing it to restructure its business and marketing practices.&a;nbsp;The FTC also fined the company $200 million and its sanction validated some Ackman&s;s criticisms, but the regulator did not characterize the company as &q;pyramid scheme.&q;
If Herbalife was a controversial trade that paid big in 2017, it pales in comparison to Owl Creek&a;rsquo;s recent contrarian move at the end of the year.
When South African retailer Steinhoff International disclosed significant accounting irregularities and plunged over 80%, Altman and his team spent 96 hours of almost uninterrupted work trying to figure out if there were money good bonds in its capital structure. The fund found a maturing $475 million debt issue trading at pennies on the dollar, which they believed would be among the first tranches of debt Steinhoff would repay and took a major position. That holding is already up 50% in 2018.
About Owl Creek&a;rsquo;s performance, Altman, a long time portfolio manager alongside Michael Price at Mutual Shares and then Franklin Templeton, said the following: &a;ldquo;We didn&a;rsquo;t own one FANG name any yet had outstanding performance. We look for things that are beaten down and we look for things that missed earnings.&a;rdquo;&a;nbsp;He added, &a;ldquo;in credit and equities there&a;rsquo;s always things to do.&a;rdquo;
Owl Creek was founded in 2002 as a litany of accounting frauds came to light, and Altman says his first big moves for the fund were to take positions in already battered down and infamous companies like Tyco, WorldCom and Adelphia. Out of the gate, Owl Creek ended 2002 up nearly 5%, while the broader market plunged over 20%. The next year its flagship overseas fund gained nearly 50%. In 2008, that fund fell only 10% amid the financial carnage that pulled the S&a;amp;P down nearly 40%. Since inception Owl Creek Overseas has returned 12.3% net of fees, beating the S&a;amp;P 500 by nearly 500 basis points and having a maximum drawdown of just 21%.
Now with volatility rising anew and the removal of zero interest rate policies globally, Altman expects even more opportunities for value managers who&a;rsquo;ve succeeded through multiple market cycles. Meanwhile, he&a;rsquo;s not complaining about the rise of FANG stocks and instead finding ideas on multiple continents, and in numerous styles.
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