George SorosPerhaps it would have seemed impossible to imagine as he was living through World War II, but George Soros became one of the most successful investors in history. With a current net worth north of $14 billion, Soros is largely retired as an active investor. However, he established a remarkable record while running the Quantum Group of hedge funds.
Soros is mostly known for his successes in making large bets in the currency and commodity markets. The most famous success story of his career is most likely Britain's Black Wednesdaycurrency crisis, where Soros correctly surmised that the country would have to devalue the pound and reportedly made around $1 billion on his positions.
Whereas Buffett is famous for carefully evaluating individual companies and holding those positions for years, Soros was much more inclined to base his investment decisions on what would be considered macroeconomic factors. What's more, investments in the currency and commodity markets do not lend themselves to multi-decade (or even multi-month) commitments, so Soros was a much more active investor. (George Soros spent decades as one of the world's elite investors, and even he didn't always come out on top. But when he did, it was spectacular. Check out George Soros: The Philosophy Of An Elite Investor.)
Ronald PerelmanSome will question whether Perelman is properly called an "investor." Though no one will dispute that a net worth of approximately $12 billion entitles him to be seen as a significant success in business, Pererlman's activities have centered on acquiring businesses outright, refocusing them on core competencies (often through spin-offs) and then either selling the companies later at a profit or holding onto them for the cashflow they produce. In that latter regard, though, Perelman is not so unlike Buffett - much of Buffett's success can be tied to the prudent acquisition of value-creating businesses within Berkshire Hathaway.
While Perelman has frequently faced criticism for his acquisition tactics and management decisions, he has nevertheless had many successful transactions, including his involvement in Marvel, New World Communications and several thrifts, savings and loans and banks.
John PaulsonWith about $16 billion in net worth, John Paulson is arguably the most successful hedge fund investor today. What makes that even more impressive is that he founded Paulson & Co in 1994 with purportedly with only $2 million. Paulson really made his name during the credit crisis that marked the end of the housing bubble; reportedly shorting CDOs, mortgage backed securities and other tainted housing-related assets, as well as shorting the shares of several major British banks. Perhaps ironically, Paulson has benefited from both sides of that trade, having also taken long positions in companies like Regions Financial, Goldman Sachs, Bank of America and Citigroup.
Carl IcahnIn some respects, Carl Icahn follows an approach that is somewhat similar to Warren Buffett, as Icahn has built his fortune through a combination of equity investments and outright acquisitions. That is where the similarities end, though, as Icahn has generally pursued a much more aggressive strategy and shown no particular reticence to launch hostile offers. What's more, Icahn is not often interested in investing in business and seeing them continue to run as before; Icahn has built a reputation as a so-called activist investor who frequently pushes corporate managements to restructure, sell assets and return cash to shareholders.
Differences aside, Icahn's strategy has worked. Icahn has built a fortune reportedly worth in excess of $11 billion through his involvement in a range of companies including RJR Nabisco, Viacom and Time Warner. (Buying up failing investments and turning them around helped to create the "Icahn lift" phenomenon. To learn more, check out Carl Icahn's Investing Strategy.)
James SimonsIf there is an "anti-Buffett" on this list, James Simons may be a good candidate. Holding a PhD in mathematics from Berkeley, Simons founded Renaissance Technologies and uses exceptionally complicated mathematical models to analyze and evaluate trading opportunities. While Buffett is famous for having a minimal staff, Renaissance Technologies reportedly employs dozens of PhDs in fields like physics, mathematics and statistics to find previously under-used correlations and connections that can be used for better trading results.
Or at least that is as much as is known about Renaissance Technologies - while Buffett is rather open about his investment philosophies and methodologies, Simons maintains a much lower profile. Nevertheless, this heavily quantitative approach seems to work. Mr. Simons is estimated to be worth nearly $11 billion and his funds have been so successful that they can charge outsized management fees and profit participation percentages to investors.
Others Worthy Of NoteInvestors would also do well to consider the careers of other well-known investors like Jim Rogers, Mark Mobius, and Peter Lynch. While Mobius is the only one of the three still highly involved in day-to-day investment operators, all three men have become very closely associated with their particular investment philosophies. Rogers is a go-to commentator on commodities and macroeconomic investments, while Mobius may be the best known emerging-markets investor of all time.
Peter Lynch, though many years removed his tenure at Fidelity and his management of the Magellan fund, is still widely seen as a leading voice in "disciplined growth" investing. All three men have written about their investment philosophies and outlooks, and their approaches are accessible and informative. (For related reading, check Pick Stocks Like Peter Lynch.)
The Bottom LineInvestors should cast their eyes beyond Warren Buffett if they wish to really learn about all that investing can offer. There is no doubting or ignoring Buffett's exemplary record, but there is always more to learn by broadening the pool of examples. While investors like Simons and Soros may seem to focus on strategies and techniques that are beyond the means of regular investors, there are still valuable lessons to be learned about macroeconomics and the benefits of looking at the markets in new and proprietary ways.
http://www.investopedia.com/financial-edge/0511/great-investors-not-named-buffett.aspx?utm_source=coattail-buffett&utm_medium=Email&utm_campaign=WBW-7/18/2013
Showing posts with label John Paulson. Show all posts
Showing posts with label John Paulson. Show all posts
Thursday, 18 July 2013
Friday, 2 December 2011
Hedge fund legend Paulson has lost out heavily by backing a booming economic recovery which has not materialised.
Recovery hopes painful for hedge fund legend Paulson
John Paulson, the hedge fund manager who made billions betting on a collapse in US house prices, has lost out heavily by backing a booming economic recovery which has not materialised.
John Paulson, the hedge fund manager who made billions betting on a collapse in US house prices, has lost out heavily by backing a booming economic recovery which has not materialised.
10:27PM BST 08 Oct 2011
5 CommentsWagers that the US economy and housing market would bounce back strongly have helped leave one of his flagship funds almost 50pc down for the year so far, which will fuel talk that he has lost his "magic touch".
Paulson & Co, his New York-based hedge fund with $30bn (£19bn) under management, has informed clients its Advantage Plus fund dropped almost 20pc in September, leaving it off 46.73pc for the year, sources told Reuters.
In comparison, the average hedge fund lost 2.81pc last month leaving it down 4.74pc for the year, according to data from Hedge Fund Research.
Paulson, who reports the performance of his funds to investors on a monthly basis, will make a conference call to clients on Tuesday to explain his career's biggest loss.
"I don't think I need to listen to his excuses, it would be like rubbing salt in the wounds," one said.
Paulson's famous bet on a US housing crash helped him generate a personal fortune that the Forbes Rich List puts at $15.5bn (£10bn).
But after well-placed bets on a downturn, his optimism about the US and the wider economic recovery has proved expensive. He invested heavily in America's banking sector, where share prices have slumped in recent months.
Earlier this year he suffered heavy losses over a stake in Sino-Forest, a Chinese timber company, when fraud allegations caused its share price to collapse.
Some suggest Paulson's problem is partly one of size.
Industry watchers say large hedge funds can be unwieldy to manage, with one study looking at thousands of funds finding younger, more nimble funds offered better returns.
Friday, 19 August 2011
Special report: The perils of Paulson
Special report: The perils of Paulson
Written by Reuters
Thursday, 11 August 2011 06:52
NEW YORK/BOSTON: The crown may be slipping fast from billionaire trader John Paulson's head.
The hedge fund manager became an overnight sensation in 2007 by betting big and early on the collapse of the U.S. housing market, and then doing much of the same on a surge in gold prices, Reuters reported on Wednesday, Aug 10. But he is now emerging as one of this year's big losers in the $2 trillion hedge fund industry.
His Paulson & Co. hedge fund firm, which managed $38 billion as recently as this past March, is down to about $35 billion as of the first week of August, and it shrinks a little bit more with every big drop in the U.S. stock market.
One of Paulson's two main funds is now down more than 30 percent this year, the firm has reported to clients, compared to a much smaller 6.1 percent decline for the average hedge fund, according to Hedge Fund Research.
The problem for the 55-year-old manager: His equally daring bet that the U.S. economy and housing market would rebound strongly from the financial crisis -- a big wager that looked prescient a year ago -- isn't panning out as planned.
Paulson's funds have amassed huge, mutual fund-style stakes in shares of financial institutions like Bank of America, Citigroup, Hartford Financial, Popular Inc. and American Capital. But these are ringing up hefty losses.
And with fears of a double-dip recession in the United States mounting, coupled with this month's 13 percent plunge in the S&P 500, the talk is growing on Wall Street that unless Paulson can quickly turn things around, the hedge fund king could be hit with a wave of year-end investor redemptions.
"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," said Daryl Jones, director of research at Hedgeye Risk Management, which sells investment research to institutional investors. "I would imagine it would lessen their appetite to stay with someone who is supposed to be a big superstar but is down double digits right now."
Paulson, through a firm spokesman, declined to comment. But people close to Paulson point out that other than hedge fund guru George Soros, no one has consistently made more money for clients than the man referred to by his friends and associates as "J.P."
LOYALTY TEST
This year, however, his investors' loyalty is being put to the test.
Maybe no one single trade has come to symbolize Paulson's bullishness on the U.S. economy more than Bank of America. By August 9, the troubled lender's shares were down 43 percent this year, reducing the value of the 124 million shares Paulson owned as of March 31 by $784 million. Paulson is believed to have sold some of his Bank of America shares as the stock has plunged toward the $7 mark, but the firm has refused to comment on its current position. (link.reuters.com/gem23s)
The picture isn't much prettier for Paulson's large share holdings in Citigroup, Popular (formerly Banco Popular) and SunTrust Banks. The value of Paulson's equity stake in those three banks, assuming the funds haven't sold any shares since March 31, would have declined by more than $800 million over the past four months.
And then there is Sino-Forest, the troubled Chinese forestry company. Paulson absorbed a $500 million loss on the stock in June after allegations of accounting irregularities at the Hong Kong-based company surfaced earlier in the month. (link.reuters.com/hem23s)
The series of missteps is tarnishing the near god-like status the former Bear Stearns trader has earned over the past few years.
Much of the $20 billion in outside investor money Paulson manages has come from pension funds and clients who bought in after he made $15 billion for the firm in 2007 on his well-chronicled subprime mortgage trade. Paulson raised that money by making his hedge fund one of the most widely available to wealthy customers of dozens of large and small brokerage firms.
Now some investors who got in after Paulson's so-called Alpha moment are getting out this fall, or are seriously considering doing so at year's end. Some in the industry are wondering whether Paulson's flagship Advantage funds, with $15 billion in assets, are too large and thus not nimble enough to navigate increasingly choppy markets for stocks.
Francis Bielli, executive director of the Philadelphia Board of Pensions and Retirement, said on June 30 that the board voted to submit a redemption for its entire $12.4 million investment in the Paulson Advantage fund. The Philadelphia municipal pension, which manages $3.7 billion, had originally invested $15 million with Paulson in December 2008. In June 2010, it withdrew $4 million of that money.
Joelle Mevi, of the Public Employees Retirement Association of New Mexico, invested with Paulson Advantage fund in March 2010. She is holding tight for the moment. But she says the $11.8 billion public pensions administrator is keeping a close eye on Paulson's performance and is concerned about his "exposure to financials."
Paulson won't comment on investor redemptions, but he is trying to put his clients at ease. On August 5, the firm took the unusual step of sending out a letter to investors, informing them that for the period ending September 30, investors were seeking to withdraw $420 million from the firm. The letter says that's "less than the average quarterly redemptions over the past 2 years." But the firm was silent about potential year-end redemptions.
PARTY CRASHES
Hedge fund industry watchers say what's gone on at Paulson this year is indicative of what often happens with hot managers as they get big and take larger and larger bets.
A study last year by research firm PerTrac Financial Solutions, which looked at the performance of thousands of hedge funds over a period of years, found that "investors who wish to maximize return should start their search by looking for younger funds." The report also found that except for 2008 - one of the worst years ever for the hedge fund industry - smaller funds have tended to outperform large hedge funds over the long haul.
Patrick Adelsbach, a partner and director of event-driven research at hedge fund consulting firm Aksia, says whenever a hedge fund gets too large, there is a concern about a manager getting "boxed in" by taking outsized stock positions. He says the irony is that the more assets a manager has to deploy, the more ordinary the trades can become.
When analyzing hedge funds for pension fund clients, Adelsbach says he keeps an eye out to make sure a manager isn't starting to emulate a "mutual fund strategy" in its stock trades.
In some respects, Paulson's $15 billion Advantage funds have come to resemble a mutual fund - except that they charge the much larger fees of a hedge fund.
As of March 31, Paulson was listed as one of the largest institutional shareholders in at least eight companies, including Hartford Financial, MGM Resorts International, Mylan Inc., SunTrust, Popular, XL Group and American Capital.
In the case of MGM Resorts, Paulson's firm had 43.8 million shares as of March 31, nearly three times as many shares as four separate Vanguard funds had invested in the gambling and resort company.
Alan Gold, a Chicago resident who invests in hedge funds and real estate, says he has shied away from Paulson, although he's been pitched a number of times. Gold says he tends to avoid large hedge funds because they can be "unwieldy" to manage, which makes it harder "to find good quality investments."
Paulson's enormous 124-million-share bet on Bank of America is a classic example of a bold thematic play on a beaten-down stock.
The move can look brilliant when the shares rise - which initially happened for Paulson when he first bought nearly 168 million shares of Bank of America in summer 2009. At the time the stock was selling for around $11 and briefly traded as high as $19 in April 2010. But when things go the other way and the stock is falling like a knife, it's hard to quickly get out of that position.
In a July conference call with investors, Paulson conceded he had too much exposure to financial stocks and was reducing holdings in bank stocks with problematic mortgages such as Bank of America. But he has not offered any firm guidance on what his funds have been selling. (link.reuters.com/fem23s)
The issue of size has been raised before. In a 2008 year-end investor letter, the manager wrote investors often "ask if our large asset base impedes our ability to maintain high levels of performance." He continued: "Although that may be the case in the future, we have not reached that point yet."
GOLDEN DAYS
Some of Paulson's most attractive investment opportunities are concentrated in some of the smallest funds he manages.
His $1 billion Paulson Gold Fund, launched last year, is soaring ever higher, with the price of the precious metal reaching new heights every day. With gold now selling for around $1,792 an ounce, the Gold Fund, which had been up 2.7 percent through July could be up as much as 6 percent for the year, an investor said.
The $3 billion Paulson Recovery Fund, which is flat for the year, is booking a whopping 200 percent paper gain on its $150 million investment in OneWest, a California-based bank that emerged from the wreckage of failed savings-and-loan IndyMac. The bank, which Paulson and other deep-pocketed investors bought with help from the Federal Deposit Insurance Corp., is potentially eyeing an initial public offering next year.
Also up is the Paulson Real Estate Recovery Fund. The small, $350 million private-equity-style fund is buying vacant land with approval rights to build hundreds of single-family homes. It targets failed complexes in Colorado, Arizona, Florida and California. The fund gained 22 percent last year.
Paulson believes that in five years time, the housing market will have recovered enough to enable the small fund to make a bundle from reselling the properties, which it acquired at bargain basement prices. In the meantime, Paulson is earning income as a landlord by renting out some of the luxury homes that were previously built before the developers went bust.
But the majority of Paulson investors aren't in any of these funds, and have their money in the beleaguered Advantage funds.
Paulson, who Forbes says has an estimated net worth of $16 billion, has pointed out that he and his employees are co-investors along with his customers. So the manager and his employees are sharing in some of the suffering his clients are enduring.
It's true that about 40 percent of the firm's $35 billion in assets is either Paulson's money or that of his employees. But the firm does not require its employees to pay the typical 1.5 percent asset management fee and the 20 percent performance fee the fund collects from outside investors.
Also, a good deal of the money invested by Paulson and his employees in the Advantage funds is committed to a so-called gold-denominated share class, which is performing far better than the plain vanilla version of the funds. But many of the Wall Street brokerage houses that sell access to Paulson funds don't offer the gold-denominated alternative, which Paulson introduced in 2009. About a third of the $35 billion Paulson manages is committed to the gold-share class.
For many investors, the inability to access smaller funds or the gold-share class of the Advantage funds didn't matter when Paulson was posting high double-digit returns. But with the Advantage funds losing ground, more on Wall Street are starting to wonder about why Paulson moved so actively to rake in outside money the past few years.
Paulson was largely an unknown figure before the subprime bet paid off. He toiled in relative obscurity and managed just several billion dollars for wealthy investors and small endowments from his mid-town Manhattan office. Until recently, he took the bus to work, say investors who know him.
But the subprime bet, chronicled in the book "The Greatest Trade Ever" by Wall Street Journal reporter Gregory Zuckerman, catapulted him to rock star status and made many millionaires want to invest with him.
COME ON IN
Paulson did much to open the doors. He made his funds - in most cases just the Advantage funds - available to wealthy customers of Wall Street brokerages and small investment advisory firms.
These distribution channels, or "platforms" in hedge-fund jargon, are a cheaper way for wealthy individual investors to access Paulson. The manager normally has a $10 million investment requirement. But for as little as $100,000, an investor with several million dollars in assets can put money into a Paulson fund through these brokerage firms.
An increasing number of hedge funds, like D.E. Shaw & Co., Israel Englander's Millennium Management and Daniel Loeb's Third Point, are available to wealthy clients of UBS, Morgan Stanley and Bank of America's Merrill Lynch. But few funds are on as many of these platforms as Paulson.
In the United States, wealthy individuals can also turn to smaller firms like Mount Yale Capital Group, Luminous Capital, Krusen Capital, Altegris Investments and CAIS Capital. In Europe, Paulson funds are sold through Lyxor and Deutsche Bank. In Australia and New Zealand, a small firm called Ashton Funds sells access to Paulson.
To tap into these large brokerage and smaller investment advisory firms, a few years ago Paulson hired Claudio Macchetto from Citigroup's alternative investments group to serve as director of global platform operations. Macchetto, who reports to Paulson investor relations head James Wong, heads his own team of a half dozen employees.
Overall, nearly two-dozen of Paulson's 120 employees are involved in either investor relations or marketing. That's considerably more than other leading funds.
Dan Loeb's Third Point, with about $8 billion under management, has just four people in investor relations and marketing. Steven Cohen's SAC Capital Advisors, with $14 billion under management and more than 800 employees, has about a dozen people in marketing and investor relations.
Och Ziff, founded by Dan Och in 1994, the same year Paulson went out on his own, has about 20 investor relations and marketing people, out of more than 420 employees.
Paulson's large marketing team has enabled the firm to maintain a consistent flow of new investor money coming into the firm, even as it regularly sees several hundred million dollars in redemption each quarter, according to the August 5 memo from Wong, Paulson's investor-relations director. Paulson loyalists point out the fund's assets have largely held stable the last few years and more of its growth has come from performance than taking in net new money.
For a large fund, amassing money to manage - what's called "asset gathering" in the industry - can be lucrative in and of itself.
Using a back of the envelope calculation, Paulson is taking in about $300 million a year in asset management fees from his outside investors.
"I completely understand why Paulson would want to build out exposure to independent firm platforms like ours, because it allows funds to access a different advisor and client base," says David King, a partner with U.S. Capital Advisors in Dallas, a firm that manages $1.5 billion and offers customers an opportunity to invest in the Advantage funds through an arrangement it has with CAIS Capital.
"But I am puzzled why the Paulson funds are offered on so many of the large bank and wirehouse platforms," says King.
Earlier this year, Paulson showed up at an event sponsored by UBS, which began selling Paulson's Advantage fund to its high-net worth customers last year. At that meeting, Paulson talked about why he was so bullish on shares of casino company MGM Resorts. In March, Paulson reported owning 43.8 million shares. But the stock has been a bust this year. MGM Resorts is down about 25 percent as of August 9.
Not everyone sees all this marketing by Paulson as a bad thing. It may have helped him develop a loyal investor base. He's known for throwing lavish investor gatherings in Las Vegas and Paris. Such attention may be one reason redemptions for the third quarter are running relatively low, despite the poor performance of the Advantage funds.
In fact, new money is still coming in. In the August 5 letter on redemptions, Wong hinted at that, saying: "redemptions may be offset by subscriptions."
The $2.1 billion Houston Municipal Employees Pension System put $10 million into the Advantage fund in March. And a spokesman for the $18 billion Texas County & District Retirement System, which last year invested $40 million with Paulson, says the public pension has no plans to redeem.
Dr. Lewis Feder, a Manhattan plastic surgeon with a list of celebrity patients, says he has no plans to bolt from Paulson, with whom he has invested for nearly a decade. Feder says he has money in six Paulson funds, including the small real estate recovery fund.
"He has a remarkable team employed around him," said Feder. "He doesn't go out looking for money as much as it comes to him."
A big test for investors, even Paulson's most loyal ones, comes in December, when the next opportunity to exit the fund comes up.
http://www.theedgemalaysia.com/first/191071-special-report-the-perils-of-paulson.html
Written by Reuters
Thursday, 11 August 2011 06:52
NEW YORK/BOSTON: The crown may be slipping fast from billionaire trader John Paulson's head.
The hedge fund manager became an overnight sensation in 2007 by betting big and early on the collapse of the U.S. housing market, and then doing much of the same on a surge in gold prices, Reuters reported on Wednesday, Aug 10. But he is now emerging as one of this year's big losers in the $2 trillion hedge fund industry.
His Paulson & Co. hedge fund firm, which managed $38 billion as recently as this past March, is down to about $35 billion as of the first week of August, and it shrinks a little bit more with every big drop in the U.S. stock market.
One of Paulson's two main funds is now down more than 30 percent this year, the firm has reported to clients, compared to a much smaller 6.1 percent decline for the average hedge fund, according to Hedge Fund Research.
The problem for the 55-year-old manager: His equally daring bet that the U.S. economy and housing market would rebound strongly from the financial crisis -- a big wager that looked prescient a year ago -- isn't panning out as planned.
Paulson's funds have amassed huge, mutual fund-style stakes in shares of financial institutions like Bank of America, Citigroup, Hartford Financial, Popular Inc. and American Capital. But these are ringing up hefty losses.
And with fears of a double-dip recession in the United States mounting, coupled with this month's 13 percent plunge in the S&P 500, the talk is growing on Wall Street that unless Paulson can quickly turn things around, the hedge fund king could be hit with a wave of year-end investor redemptions.
"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," said Daryl Jones, director of research at Hedgeye Risk Management, which sells investment research to institutional investors. "I would imagine it would lessen their appetite to stay with someone who is supposed to be a big superstar but is down double digits right now."
Paulson, through a firm spokesman, declined to comment. But people close to Paulson point out that other than hedge fund guru George Soros, no one has consistently made more money for clients than the man referred to by his friends and associates as "J.P."
LOYALTY TEST
This year, however, his investors' loyalty is being put to the test.
Maybe no one single trade has come to symbolize Paulson's bullishness on the U.S. economy more than Bank of America. By August 9, the troubled lender's shares were down 43 percent this year, reducing the value of the 124 million shares Paulson owned as of March 31 by $784 million. Paulson is believed to have sold some of his Bank of America shares as the stock has plunged toward the $7 mark, but the firm has refused to comment on its current position. (link.reuters.com/gem23s)
The picture isn't much prettier for Paulson's large share holdings in Citigroup, Popular (formerly Banco Popular) and SunTrust Banks. The value of Paulson's equity stake in those three banks, assuming the funds haven't sold any shares since March 31, would have declined by more than $800 million over the past four months.
And then there is Sino-Forest, the troubled Chinese forestry company. Paulson absorbed a $500 million loss on the stock in June after allegations of accounting irregularities at the Hong Kong-based company surfaced earlier in the month. (link.reuters.com/hem23s)
The series of missteps is tarnishing the near god-like status the former Bear Stearns trader has earned over the past few years.
Much of the $20 billion in outside investor money Paulson manages has come from pension funds and clients who bought in after he made $15 billion for the firm in 2007 on his well-chronicled subprime mortgage trade. Paulson raised that money by making his hedge fund one of the most widely available to wealthy customers of dozens of large and small brokerage firms.
Now some investors who got in after Paulson's so-called Alpha moment are getting out this fall, or are seriously considering doing so at year's end. Some in the industry are wondering whether Paulson's flagship Advantage funds, with $15 billion in assets, are too large and thus not nimble enough to navigate increasingly choppy markets for stocks.
Francis Bielli, executive director of the Philadelphia Board of Pensions and Retirement, said on June 30 that the board voted to submit a redemption for its entire $12.4 million investment in the Paulson Advantage fund. The Philadelphia municipal pension, which manages $3.7 billion, had originally invested $15 million with Paulson in December 2008. In June 2010, it withdrew $4 million of that money.
Joelle Mevi, of the Public Employees Retirement Association of New Mexico, invested with Paulson Advantage fund in March 2010. She is holding tight for the moment. But she says the $11.8 billion public pensions administrator is keeping a close eye on Paulson's performance and is concerned about his "exposure to financials."
Paulson won't comment on investor redemptions, but he is trying to put his clients at ease. On August 5, the firm took the unusual step of sending out a letter to investors, informing them that for the period ending September 30, investors were seeking to withdraw $420 million from the firm. The letter says that's "less than the average quarterly redemptions over the past 2 years." But the firm was silent about potential year-end redemptions.
PARTY CRASHES
Hedge fund industry watchers say what's gone on at Paulson this year is indicative of what often happens with hot managers as they get big and take larger and larger bets.
A study last year by research firm PerTrac Financial Solutions, which looked at the performance of thousands of hedge funds over a period of years, found that "investors who wish to maximize return should start their search by looking for younger funds." The report also found that except for 2008 - one of the worst years ever for the hedge fund industry - smaller funds have tended to outperform large hedge funds over the long haul.
Patrick Adelsbach, a partner and director of event-driven research at hedge fund consulting firm Aksia, says whenever a hedge fund gets too large, there is a concern about a manager getting "boxed in" by taking outsized stock positions. He says the irony is that the more assets a manager has to deploy, the more ordinary the trades can become.
When analyzing hedge funds for pension fund clients, Adelsbach says he keeps an eye out to make sure a manager isn't starting to emulate a "mutual fund strategy" in its stock trades.
In some respects, Paulson's $15 billion Advantage funds have come to resemble a mutual fund - except that they charge the much larger fees of a hedge fund.
As of March 31, Paulson was listed as one of the largest institutional shareholders in at least eight companies, including Hartford Financial, MGM Resorts International, Mylan Inc., SunTrust, Popular, XL Group and American Capital.
In the case of MGM Resorts, Paulson's firm had 43.8 million shares as of March 31, nearly three times as many shares as four separate Vanguard funds had invested in the gambling and resort company.
Alan Gold, a Chicago resident who invests in hedge funds and real estate, says he has shied away from Paulson, although he's been pitched a number of times. Gold says he tends to avoid large hedge funds because they can be "unwieldy" to manage, which makes it harder "to find good quality investments."
Paulson's enormous 124-million-share bet on Bank of America is a classic example of a bold thematic play on a beaten-down stock.
The move can look brilliant when the shares rise - which initially happened for Paulson when he first bought nearly 168 million shares of Bank of America in summer 2009. At the time the stock was selling for around $11 and briefly traded as high as $19 in April 2010. But when things go the other way and the stock is falling like a knife, it's hard to quickly get out of that position.
In a July conference call with investors, Paulson conceded he had too much exposure to financial stocks and was reducing holdings in bank stocks with problematic mortgages such as Bank of America. But he has not offered any firm guidance on what his funds have been selling. (link.reuters.com/fem23s)
The issue of size has been raised before. In a 2008 year-end investor letter, the manager wrote investors often "ask if our large asset base impedes our ability to maintain high levels of performance." He continued: "Although that may be the case in the future, we have not reached that point yet."
GOLDEN DAYS
Some of Paulson's most attractive investment opportunities are concentrated in some of the smallest funds he manages.
His $1 billion Paulson Gold Fund, launched last year, is soaring ever higher, with the price of the precious metal reaching new heights every day. With gold now selling for around $1,792 an ounce, the Gold Fund, which had been up 2.7 percent through July could be up as much as 6 percent for the year, an investor said.
The $3 billion Paulson Recovery Fund, which is flat for the year, is booking a whopping 200 percent paper gain on its $150 million investment in OneWest, a California-based bank that emerged from the wreckage of failed savings-and-loan IndyMac. The bank, which Paulson and other deep-pocketed investors bought with help from the Federal Deposit Insurance Corp., is potentially eyeing an initial public offering next year.
Also up is the Paulson Real Estate Recovery Fund. The small, $350 million private-equity-style fund is buying vacant land with approval rights to build hundreds of single-family homes. It targets failed complexes in Colorado, Arizona, Florida and California. The fund gained 22 percent last year.
Paulson believes that in five years time, the housing market will have recovered enough to enable the small fund to make a bundle from reselling the properties, which it acquired at bargain basement prices. In the meantime, Paulson is earning income as a landlord by renting out some of the luxury homes that were previously built before the developers went bust.
But the majority of Paulson investors aren't in any of these funds, and have their money in the beleaguered Advantage funds.
Paulson, who Forbes says has an estimated net worth of $16 billion, has pointed out that he and his employees are co-investors along with his customers. So the manager and his employees are sharing in some of the suffering his clients are enduring.
It's true that about 40 percent of the firm's $35 billion in assets is either Paulson's money or that of his employees. But the firm does not require its employees to pay the typical 1.5 percent asset management fee and the 20 percent performance fee the fund collects from outside investors.
Also, a good deal of the money invested by Paulson and his employees in the Advantage funds is committed to a so-called gold-denominated share class, which is performing far better than the plain vanilla version of the funds. But many of the Wall Street brokerage houses that sell access to Paulson funds don't offer the gold-denominated alternative, which Paulson introduced in 2009. About a third of the $35 billion Paulson manages is committed to the gold-share class.
For many investors, the inability to access smaller funds or the gold-share class of the Advantage funds didn't matter when Paulson was posting high double-digit returns. But with the Advantage funds losing ground, more on Wall Street are starting to wonder about why Paulson moved so actively to rake in outside money the past few years.
Paulson was largely an unknown figure before the subprime bet paid off. He toiled in relative obscurity and managed just several billion dollars for wealthy investors and small endowments from his mid-town Manhattan office. Until recently, he took the bus to work, say investors who know him.
But the subprime bet, chronicled in the book "The Greatest Trade Ever" by Wall Street Journal reporter Gregory Zuckerman, catapulted him to rock star status and made many millionaires want to invest with him.
COME ON IN
Paulson did much to open the doors. He made his funds - in most cases just the Advantage funds - available to wealthy customers of Wall Street brokerages and small investment advisory firms.
These distribution channels, or "platforms" in hedge-fund jargon, are a cheaper way for wealthy individual investors to access Paulson. The manager normally has a $10 million investment requirement. But for as little as $100,000, an investor with several million dollars in assets can put money into a Paulson fund through these brokerage firms.
An increasing number of hedge funds, like D.E. Shaw & Co., Israel Englander's Millennium Management and Daniel Loeb's Third Point, are available to wealthy clients of UBS, Morgan Stanley and Bank of America's Merrill Lynch. But few funds are on as many of these platforms as Paulson.
In the United States, wealthy individuals can also turn to smaller firms like Mount Yale Capital Group, Luminous Capital, Krusen Capital, Altegris Investments and CAIS Capital. In Europe, Paulson funds are sold through Lyxor and Deutsche Bank. In Australia and New Zealand, a small firm called Ashton Funds sells access to Paulson.
To tap into these large brokerage and smaller investment advisory firms, a few years ago Paulson hired Claudio Macchetto from Citigroup's alternative investments group to serve as director of global platform operations. Macchetto, who reports to Paulson investor relations head James Wong, heads his own team of a half dozen employees.
Overall, nearly two-dozen of Paulson's 120 employees are involved in either investor relations or marketing. That's considerably more than other leading funds.
Dan Loeb's Third Point, with about $8 billion under management, has just four people in investor relations and marketing. Steven Cohen's SAC Capital Advisors, with $14 billion under management and more than 800 employees, has about a dozen people in marketing and investor relations.
Och Ziff, founded by Dan Och in 1994, the same year Paulson went out on his own, has about 20 investor relations and marketing people, out of more than 420 employees.
Paulson's large marketing team has enabled the firm to maintain a consistent flow of new investor money coming into the firm, even as it regularly sees several hundred million dollars in redemption each quarter, according to the August 5 memo from Wong, Paulson's investor-relations director. Paulson loyalists point out the fund's assets have largely held stable the last few years and more of its growth has come from performance than taking in net new money.
For a large fund, amassing money to manage - what's called "asset gathering" in the industry - can be lucrative in and of itself.
Using a back of the envelope calculation, Paulson is taking in about $300 million a year in asset management fees from his outside investors.
"I completely understand why Paulson would want to build out exposure to independent firm platforms like ours, because it allows funds to access a different advisor and client base," says David King, a partner with U.S. Capital Advisors in Dallas, a firm that manages $1.5 billion and offers customers an opportunity to invest in the Advantage funds through an arrangement it has with CAIS Capital.
"But I am puzzled why the Paulson funds are offered on so many of the large bank and wirehouse platforms," says King.
Earlier this year, Paulson showed up at an event sponsored by UBS, which began selling Paulson's Advantage fund to its high-net worth customers last year. At that meeting, Paulson talked about why he was so bullish on shares of casino company MGM Resorts. In March, Paulson reported owning 43.8 million shares. But the stock has been a bust this year. MGM Resorts is down about 25 percent as of August 9.
Not everyone sees all this marketing by Paulson as a bad thing. It may have helped him develop a loyal investor base. He's known for throwing lavish investor gatherings in Las Vegas and Paris. Such attention may be one reason redemptions for the third quarter are running relatively low, despite the poor performance of the Advantage funds.
In fact, new money is still coming in. In the August 5 letter on redemptions, Wong hinted at that, saying: "redemptions may be offset by subscriptions."
The $2.1 billion Houston Municipal Employees Pension System put $10 million into the Advantage fund in March. And a spokesman for the $18 billion Texas County & District Retirement System, which last year invested $40 million with Paulson, says the public pension has no plans to redeem.
Dr. Lewis Feder, a Manhattan plastic surgeon with a list of celebrity patients, says he has no plans to bolt from Paulson, with whom he has invested for nearly a decade. Feder says he has money in six Paulson funds, including the small real estate recovery fund.
"He has a remarkable team employed around him," said Feder. "He doesn't go out looking for money as much as it comes to him."
A big test for investors, even Paulson's most loyal ones, comes in December, when the next opportunity to exit the fund comes up.
http://www.theedgemalaysia.com/first/191071-special-report-the-perils-of-paulson.html
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