Fund Manager’s Bet on Insurer Coventry Could Pay Off Big

By Katya Wachtel | August 21, 2012

Several big name hedge fund managers opened sizable stakes in health care insurance companies during the second quarter, and David Einhorn’s bet on Coventry Health Care Inc. may already be paying huge dividends for the closely watched investor.

On Monday Coventry’s shares rose 20 percent after health insurer Aetna Inc. announced it would acquire its competitor for $5.6 billion in an effort to bolster its share of the U.S. government-backed Medicare and Medicaid programs.

That means Einhorn’s Greenlight Capital stake, if it was not decreased or increased since June 30, is worth about $280 million, resulting in an approximately $72 million windfall.

Einhorn’s Greenlight Capital established a new 6,660,000 share stake in Coventry in the second quarter, according to a regulatory filing that shows a fund’s equity positions for the previous quarter. Greenlight revealed it had purchased Coventry shares at an average price of $31.22, in an investor note dated July 23.

Coventry’s shares closed at $42.04 on Monday.

Shares of Aetna, which will add more than 5 million members to its books, rose 5.6 percent on Monday to close at $40.18.

Through a spokesman, Greenlight declined to comment on Coventry.

Greenlight also initiated a position in Cigna and WellPoint Inc. in the last quarter, part of the hedge fund manager’s view that health care stocks are cheap and somewhat immune from the negative global macro forces that are affecting other sectors like finance and retail.

“The entire sector had been battered in anticipation of Obamacare. For the most part, these companies have unlevered balance sheets and trade at single-digit P/E multiples on earnings that should continue to grow,” Einhorn said in the July 23 investor note. “They have no exposure to the European currency crisis, a possible Chinese slowdown or other cyclical headwinds.”

“While the stocks are already cheap, there is the additional unpriced upside in the possibility that the election changes the political landscape, resulting in a possible modification or repeal of Obamacare,” he added.

Returns for New York-based Greenlight’s flagship fund, which manages almost $8 billion in client assets, rose 2.7 percent in July, pushing yearly gains to 6.4 percent through July 31.

Other hedge funds that owned sizable chunks of Coventry at the end of the second quarter included Barry Rosenstein’s Jana Partners, which owned about 2.8 million shares, according to a regulatory filing. Israel Englander’s Millennium Management owned just over 273,000 shares as of June 30, a regulatory filing showed. Jana Partners and Millennium declined to comment on their Coventry holdings.

Health care insurers were the focus of several well known hedge fund managers during the second quarter.

Daniel Loeb’s Third Point opened a new position in UnitedHeath Group Inc., Aetna and WellPoint. John Paulson’s Paulson & Co. upped its stake in HCA Holdings by 397 percent to 8 million shares.

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