John Paulson made his mark in 2007 quite impressively by betting on the fail of the US housing market, then after that the run-up in gold prices. However, his fund now is suffering from a decline in performance. One of his two main funds is down more than 30%, whereas other hedge funds are down 6.1%. Daryl Jones, the director of research at Hedgeye Risk Management has commented, “There are many investors who have experienced great gains with John Paulson, but a lot of the money has come into his funds after those great gains were achieved, and the relative newcomers are seeing a lot of heavy losses.”
John Paulson has bet heavily on banking stocks including Bank of America (BAC), Citigroup (C), Popular (BPOP) and SunTrust Banks (STI). The most significant one is Bank of America, reducing his position in this bank around $784 million, and for three banks with the drop of $800 million over the last four months. Another position is Sino-Forest, where he has taken a $500 million loss in June after its accounting issues.
After he was very successful with his bet on the mortgage meltdown in 2007, earning $15 billion, pension funds and other investors poured in $20 billion more. Now Reuters has reported that investors that got in after his gold time are getting out, either in the fall or year end. Several institutional investors are keeping an eye on his performance and are worried about his large exposure to financials.
In order to react to that, on August 5, the firm sent a letter to investors, notifying them that for the period ending September 30, investors were seeking to withdraw $420 million. The letter mentioned that is “less than average quarterly redemptions over the past 2 years.”
A research firm called PerTrac Financial Solutions has looked at thousands of hedge funds' performance for a period of years and found that “investors who wish to maximize return should start their search by looking at younger funds.” Whenever the size is getting too large, they added, there is a concern that the manager might take outsized stock positions. The more assets a manager has to deploy, the more ordinary the trades can turn out. The bet on Bank of America of 124 million shares is a classic example of a play on a beaten down stock.
Actually the smallest funds of Paulson are the ones that are doing quite efficiently to this point. His $1 billion Paulson Gold Fund is rising quite high due to the rise in gold prices. The $3 billion Paulson Recovery Fund, which had been flat for a year, now booked a 200% paper gain on a $150 million investment into OneWest California bank. Another is the Paulson Real Estate Recovery Fund. The small private equity fund of $350 million is buying vacant land with approval rights to build lots of single-family homes. The fund returned 22% last year.
The full special report by Reuters is here.