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s Profile & Performance
John Paulson is the President and Portfolio Manager of Paulson & Co. Inc. Paulson was ranked by Absolute Return Magazine as the 3rd largest hedge fund in the world managing approximately $29bn in merger, event and distressed strategies. Mr. Paulson received his Masters of Business Administration with high distinction, as a Baker Scholar, from Harvard Business School in 1980. He graduated summa cum laude in Finance from New York University's College of Business and Public Administration in 1978. Prior to forming Paulson in 1994, John was a general partner of Gruss Partners and a managing director in mergers and acquisitions at Bear Stearns.
John Paulson, a former mergers and acquisitions banker, established his firm as a merger arbitrage hedge fund manager, seeking to make money from situations when one public company announces plans to take over another. Merger arbitrage hedge funds primarily study equity markets, but they also research the market for credit default swaps, a form of insurance that starts paying out as soon as a credit security falls in value.
When Pfizer Inc. (NYSE:PFE) and Allergan Plc (NYSE:AGN) announced their proposed merger deal collapsed on April 6, so too did the hopes of several influential hedge fund managers who staked much capital on its success, but some investors have seen benefits. Read more...
As 13F filings rolled in this week, the most notable revelation of John Paulson (Trades, Portfolio)’s was his reduction of his SPDR Gold Trust (GLD) stake, a mainstay of his portfolio for years, at a significant loss. Paulson, the head of hedge fund Paulson & Co., in his next most prominent move increased his holding of health care stocks for the seventh consecutive quarter. The sector made up more than 57% of his long portfolio, compared to 48.3% the previous quarter. Read more...
In a short span of time, John Paulson catapulted to the status of one of the most successful investors in history. He made an unprecedented $3.7 billion in one year in 2007 foreseeing the subprime debacle and earned massive returns on several other bets in recent years. His ability to achieve such success while the majority of the investment world cratered has left many investors asking how he did it and what they could learn from him. In his 2010 investor letter, he broadly explained that his firm made billions by “anticipating market events before they are generally recognized.”
Before the events that would make him legendary, Paulson was a successful hedge fund manager focusing on risk arbitrage. His arbitrage funds are his oldest, dating back to 1994, and their track record shows that they resisted economic downturns and returned above average rates over the long term (approximately 17% compared to 10% of the S&P 500). His first fund had only one down year since its inception in 1994. By the end of 2004, Paulson & Co. managed $2.9 billion.
In a 2003 interview with Hedge Fund News, he said that in risk arbitrage his method to outperform the merger arbitrage index was to minimize drawdowns from deals that break, by weighting portfolio to deals that could receive higher bids, by focusing on unique deal structures which offer the potential for higher returns and by occasionally shorting the weaker transactions.”
The first banner year for Paulson occurred in 2007. As early as 2005, he began to recognize the trouble with the mortgage industry. Banks were offering mortgages – often at adjustable rates – with few restrictions or credit requirements; when the rates went up and people could no longer pay, they would have to refinance or default. The loans were based on the presumption that housing prices would continue to increase. Paulson told the Financial Crisis Committee in 2010 that when he recognized that home prices ceased going up, he began buying securities against low-graded loans likely to default.
Mortgage dealers told Paulson that the mortgages were safe because home prices had never declined on a national scale since the Great Depression. “Our opinion was [home prices] were overvalued and they were going to correct and that the quality of mortgages was very poor, and the losses would likely be substantial,” Paulson said. By June 2006, he set up a fund for credit default swaps – a form of insurance which would pay him if people could not pay their loans – to capitalize on the fallout.
By February of 2007, before the credit crisis actually hit, his return soared to 66%. By the end of 2007, his firm had made $15 billion.
Shorting Financials (2008)
In early 2008, he even made money as financial institutions related to the mortgage backed securities collapsed. He did it primarily by shorting stocks in some of the world’s largest financial institutions, betting they would fail. He shorted Fannie Mae, Freddie Mac, Barclays (BCS), Royal Bank of Scotland (RBS) and Lloyds TSB (LYG). By November of 2008, his firm had $36 billion assets under management.
Financial Recovery (2009)
As he profited when the financial sector fell apart, so he profited as it began to recover in 2009. In a speech at a hedge-fund seminar in Tokyo, Paulson called distressed assets in the U.S. “the best opportunity in a lifetime.” He formed a new fund called the Paulson Recovery Fund in 2008, making investments, primarily in the financial sector, that would appreciate as the economy improved. He also deemed the consumer staples, pharmaceutical and health industries as attractive options.
In Paulson’s 2009 investor letter, he said the biggest challenge to performance was picking the right security and the right entry point. “Many investors have tried to buy at what they thought was the bottom but to date almost every investor that has bought financial equity securities has lost money,” he wrote.
Paulson & Co. followed approximately 70 banks in 2009, analyzing them based on need for further equity, core earnings forecasts, estimated losses and projected capital deficiency. They then projected earnings per share that would help them forecast future prices. The Paulson Recovery Fund had a return of 25.49% in 2009.
His best returns in 2009 came from his Credit Funds, which were up 28.45% through November, beating the industry average of 13.6%. He made most of the money in that fund through buying an assortment of cheap loans and bonds and selling them for a profit.
In 2009, Paulson increased his investment in the gold sector. He created the Paulson Gold Fund in April 2009, and five gold mining stocks comprise 14% of his firm’s portfolio. In the first quarter of 2009, he purchased 31,500,000 shares of SPDR Gold Trust (GLD) at $89.56 per share. As of April 2011, GLD stock has risen 63% to approximately $133 per share.
His second largest gold holding is AngloGold Ashanti (AU) which comprises 7.11% of his portfolio. As of Dec. 31, 2011, he owns 40,949,437 shares. He first purchased shares of AngloGold in the first quarter of 2009 at approximately $30, and the share value has risen 64.5% since then.
He is also buying into gold-related companies. Gabriel Resources (GBU), of which he owns over 19%, is the largest potential gold mine in Europe. Gabriel Resources is an “impaired” gold company in that it has been involved in a lengthy process to obtain environmental permits and expects that it will not be until 2014 that everything will be in place to actually begin mining. But the company’s problems sent its stock price down. Paulson first bought the stock at around $2 per share in the first quarter of 2009. As of April 2011, it has increased 233% to $7.22 per share.
Paulson’s gold funds debuted with an over 35% net return. Paulson & Co. attributed the return to their “exposure to production, development, exploration gold mining shares and the rising value of derivatives.”
Gold prices have risen over 131% in the last five years. In 2010 it leaped almost 30%, and his investment paid off even better than his subprime bet in 2007: He made $5 billion. However, in the first quarter of 2011, his gold funds have lost 1.26%.
According to GuruFocus' All-in-One Screener, several gurus are focusing on stocks whose Peter Lynch fair values are far above the current prices. The following stocks are trading with wide margins of safety and at least five gurus are shareholders. More...
John Paulson (Trades, Portfolio) is the president and portfolio manager of Paulson & Co. Inc. He manages a portfolio composed of 92 stocks with a total value of $9,119 million. In both the second quarter and third quarter, the guru increased his positions in the following stocks: More...
After years of uneven returns following his multi-billion-dollar profits shorting the subprime mortgage market in 2007, Paulson’s pain intensified this year as his outsized bet on the wrong health care stocks scuttled returns and spooked investors. More...
Queens, New York native John Paulson (Trades, Portfolio) sold out his remaining shares of Lam Research (LRCX) during the second quarter for an average price of $80.37 per share. Since Paulson sold out his remaining shares, Lam Research has risen by an estimated 16% in price. More...
Early this week, Verizon Communications Inc. (NYSE:VZ) made a definitive agreement to acquire Yahoo! Inc. (NASDAQ:YHOO) for about $4.83 billion. While the merger has high potential synergies, it is subject to a high variety of risks. Using Paulson’s Merger Arbitrage Checklist, the Verizon-Yahoo merger is likely to face challenges during the process. More...
Verizon Communications Inc. (NYSE:VZ) announced a near $5 billion acquisition of Yahoo! Inc. (NASDAQ:YHOO) on July 25. With declining financials, the pioneer Internet company is likely to face bankruptcy in the short term. By acquiring Yahoo!, the management team at Verizon can produce synergies that benefit both companies in the short term. More...
The All-in-One Screener can be used to find insider buys and sells over the last week by clicking on the Insiders tab and changing the settings for All Insider Buying to “$1,000,000+” and duration to "April 2016." More...
For the second time in 2016, John Paulson (Trades, Portfolio) of Paulson & Co. has reduced his stake in Novagold Resources Inc. (NG), a Vancouver, British Columbia-based gold exploration company. More...
When Pfizer Inc. (NYSE:PFE) and Allergan Plc (NYSE:AGN) announced their proposed merger deal collapsed on April 6, so too did the hopes of several influential hedge fund managers who staked much capital on its success, but some investors have seen benefits. More...
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