Paulson & Co. Scores Again This Year

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2008年10月27日07:30

The market has crumbled, big-name hedge funds are struggling and investors are licking their wounds.

But John Paulson is having another good year.

Last year, Mr. Paulson racked up more than $15 billion of gains for his hedge-fund firm, Paulson & Co.

This year, the three main funds managed by his $35 billion firm are up between 15% and 25% so far this year, according to investors. If these gains hold, Mr. Paulson could reap a payday of more than $500 million for this year, according to estimates by investors. Last year, he personally made more than $3 billion. While some other hedge funds are up this year, in which the average hedge fund is down more than 17%. Few if any of those with good performance have as much money under management as Mr. Paulson.

‘It doesn’t make me happy that the markets are down and so many people aren’t dong well, but I’m relieved that we’re able to sail through this crisis and remain in positive territory,’ the 52-year-old Mr. Paulson said. History is full of investors who got it right, only to blow it on their next big trade. But Mr. Paulson is building on the successes of last year by expanding his bearish stance on housing.

Mr. Paulson along with a portfolio manager in his shop, Paolo Pellegrini, and their 70-person team, this year correctly anticipated that the severe difficulties that hit subprime mortgages would spill over to the broader financial system. They profited by wagering against global financial giants and British banks, according to investors and public filings.

‘We’re not macro players,’ said Mr. Paulson, who has a background in merger arbitrage and earlier this year hired Alan Greenspan for advice. ‘But because we thought we were going into a recession and the stock market usually falls in a recession, we reduced our long exposure and increased our short exposure.’

Mr. Paulson remains concerned about the global economy and expects a ‘tough’ recession. He isn’t yet spending the firm’s cash, which accounts for more than half of his portfolio, according to his investors. While Mr. Paulson has been raising a new fund worth more than $1 billion to invest in beaten-down financial firms, he isn’t doing any buying yet.

Mr. Paulson has made his share of mistakes in 2008, such as buying Mirant Corp., a utility that has fallen 62% in the past year. Yahoo Inc. has been another decliner for Mr. Paulson.

His profits don’t come close to matching those of last year because of a difference in the way he has been trading. His strategy this year has involved shorting financial shares, an approach with greater downside risk. That risk discouraged him from being too aggressive and limited his upside.

Mr. Paulson resisted the urge to buy beaten-down investments, something that has hurt stars like Dinaker Singh and J. Christopher Flowers as those trades fell in value. And Mr. Paulson avoided owning shares tied to commodities or highly-rated mortgages, other moves that seemed smart for a while but that eventually cost many hedge funds dearly.

Late last year, as Mr. Paulson’s funds built up gains holding credit-default swaps that protect against defaults of subprime-mortgage debt, and by wagering against the ABX index that tracks risky mortgage debt, he began to anticipate that worse was coming.

His reasoning: The surge in consumer spending over the previous decade resulted from rising debt loads and would now slump, leading to a recession, a big drop for stocks, and a surge in volatility, he recalls telling his investors.

So late last year and earlier this year, the firm reduced its stock holdings and boosted its short positions. Mr. Paulson and his team focused almost exclusively on financial companies, arguing that many were undercapitalized and had deteriorating mortgage and other assets.

As for his subprime moves, many were unwound late last year, and almost all of the remaining trades were eliminated by July of this year, as subprime-related investments fell to pennies on the dollar. His CDS trades were paid off by his trading partners on a daily basis, allowing Mr. Paulson to sleep at night as trading partners, including leading investment banks, faltered.

‘When you win one year you don’t quit,’ Mr. Paulson said, ‘you want to win again.’

Gregory Zuckerman

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