Jeff Altman's Flagship Fund Jumps 21% on Distressed Bets

When Toys “R” Us caught credit traders off guard with its sudden plunge into bankruptcy, Jeff Altman locked in gains from the unraveling after betting against the retailer by stacking up credit-default swaps.

It was one of a handful of timely bets on out-of-favor companies that powered Altman’s Owl Creek Asset Management to big returns in 2017, according to people with knowledge of the matter. The firm’s $1.6 billion flagship Overseas Fund, which invests across the capital structure from equities to bonds and even derivatives, posted a 21 percent advance for the year.

“The broader credit market is difficult because spreads are tight and interest rates are low,” Altman said in an interview. “But you can always find a few things to do in the bankruptcy or event-driven area and we only need four or five positions to work well to be successful.”

A $525 million credit-focused fund generated gains of 13 percent, the people said, asking not to be identified as the information isn’t public. The 2017 results follow a 14 percent jump in the main fund in the previous year, one of the people said. Altman, who oversees the funds along with Dan Krueger, declined to discuss specific performance figures.

Distressed Drought

The gains have come at a handy time for the $2.5 billion hedge fund, helping it stem outflows from a firm that managed more than $6 billion in investments at its peak. Altman is hopeful that market changes in the coming years will bring hedge funds back in favor for investors.

Owl Creek has emerged as one of the better performers in a year when average hedge-fund returns hovered around 6 percent, according to Hedge Fund Research. And for a third straight year more firms are poised to shut down than those starting up as veteran fund managers head to the exits.

It has been an even more difficult period for funds focused on distressed debt, where dwindling opportunities have pushed some to take much greater risk, or be punished for being defensively positioned with their investments.

Toys Trade

Owl Creek’s biggest gains last year included wagers on casino operator Caesars Entertainment Corp.; Ascent Resources, a legacy of the late Aubrey McClendon’s oil and gas venture; and the new, slimmed-down Yahoo! stock, Altaba Inc., which tracks investments in its Japan unit and Alibaba Group Holding Ltd., the Chinese e-commerce giant.

With Toys “R” Us, it was a change in strategy for Owl Creek. The hedge fund had held the company’s bonds maturing in 2017, and had a so-called long exposure to it for the last two years. But as soon as that debt was paid off, it moved to bet against the company by purchasing insurance-like credit-default swaps contracts, while buying up some of its bonds that had exposure to international operations and which seemed to be faring better.

The swaps bet paid off almost instantly as the retailer collapsed into bankruptcy in September, shocking many who thought the retailer had more time to execute a turnaround before having to consider a Chapter 11 filing.

Altman’s firm also profited with Caesars as it worked its way through the bankruptcy process, and the hedge fund was able to convert some of its positions into the reorganized company’s equity. Wading through large, complex bankruptcies is a particularly valuable hunting ground for distressed-debt investors. Even years after a bankruptcy, it gives investors a chance to profit from the new structure that emerges from the wreckage.

Owl Creek also had a winner with its investment in Altaba’s equity, one of the people said. The fund bet that it was trading at an unjustified discount to Alibaba, even though the newly renamed Yahoo mostly tracked that investment. The stock jumped 81 percent in 2017.

The firm is focused on finding concentrated positions and then hedging against the downside, Altman said. “The tight high-yield market doesn’t create distractions for us,” he said.

Altman declined to discuss specific positions in the portfolio, but said in the coming years, hedge funds will have a greater shot at success as the tailwind of easy money that has lifted all assets fades, according to Altman.

“As global central banks pull back, it’s going to create more opportunities, and paid professionals might start to come back in vogue,” he said.

— With assistance by Nico Grant