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Thursday, 2 July 2020

John Paulson, Winner in 2008 Crisis, Latest to Quit Hedge Funds

CW8888: It is damn tough to make money and then retain all these  winning $$$! In the market; you eat other people's lunches; but some others turned back and gobble you up! LOL!

Read? John Paulson, Winner in 2008 Crisis, Latest to Quit Hedge Funds

(Bloomberg) -- Just over a decade after John Paulson shot to fame and fortune, he’s become the latest big-name money manager to quit the hedge-fund business, saying this week he’s converting his firm into a family office.

Paulson never managed to sustain the success and notoriety he found by betting against the housing market in the run up to the last financial crisis. Now, in the midst of an another period of economic turmoil, he’s returning outside investors’ money to focus on his own fortune, which the Bloomberg Billionaires Index puts at $4.4 billion.

He joins a list of industry legends who have recently called it quits amid a generational shift. Louis Bacon said in the past year that he was stepping back, as returns that were once routinely in the double digits dribbled away. David Tepper also said he was transitioning his firm, though he planned to keep a few outside clients. Stan Druckenmiller and George Soros, two legends of the 1990s, were among the first to switch to the family office model.

The move also underscores the wider tumult in the investing world, where fund managers who for decades bestrode Wall Street as revered money makers find themselves struggling to compete with computer-driven, index-tracking funds that closely follow seemingly ever-rising markets at a fraction of the cost of traditional offerings.

“After considerable reflection and careful thought, Paulson & Co. will convert into a private investment office and return all external investor capital,” Paulson wrote in a letter to investors this week. A spokeswoman for the firm didn’t immediately provide a comment.

Paulson started his firm in 1994 and built his fortune by betting against the U.S. housing market more than a decade ago. The firm’s assets slumped from a peak of $38 billion in 2011 after investment losses and client defections: As of November 2018, it ran less than $9 billion -- and most of that was Paulson’s own fortune.

Paulson’s success was based largely on on his purchase of credit-default insurance against billions of dollars of subprime mortgages before the market collapsed in 2007. The move earned his firm $15 billion -- almost $4 billion for him personally -- and rocketed Paulson to the ranks of superstar managers.

He grew up in New York City’s Queens borough, and went on to attend New York University and then Harvard Business School, where he was a Baker Scholar, in the top 5% of his class. After briefly working at Boston Consulting Group and then with Odyssey Partners, he joined Bear Stearns as an investment banker in 1984. Four years later he left for investment firm Gruss & Co. and by 1994, he had enough money to go out on his own.

He started Paulson & Co. with $2 million of his own and family and friends’ capital, and focused on risk arbitrage, betting on the shares of merging companies. The fund had grown to $300 million by 2003. At its peak, it was one of the largest hedge funds in the world.

In 2012, Paulson told Bloomberg Businessweek that he’d be “very happy” to see his firm continue after he retired, though that was something he said would still be years away. “I’m still relatively young, you know, being 56,” he said at the time.

But poor performance in the past few years had led him to reconsider. In 2018, the firm returned some investor cash, cut staff and planned to get back to basics by refocusing on merger arbitrage strategies -- the key to Paulson’s earlier success.

Just a year later, Paulson said he was considering turning the firm into a family office or making it a hybrid business with one part managing his money and another running client capital. At the time, he said as much as 80% of the money his namesake firm ran was his, and that he’d likely make a decision within two years.

“Nowadays, it’s difficult to assemble the kind of expertise in credit markets you had back in 2008 and 2009, especially because the ability to access those types of opportunities is harder today,” said Tim Ng, chief investment officer of Clearbrook Global Advisors who invested in Paulson in the late 1990s and early 2000s while at his previous firm. “And it’s harder to convince investors you have the expertise to take advantage of those opportunities.”

Ever since his big win, Paulson stumbled from one losing trade to another, chipping away at the 2007 gains that are still among the largest in hedge-fund history. He wanted the next big trade, but was too optimistic about the U.S. economic recovery and overly bearish about the European debt crisis. He forecast that gold would strengthen as investors sought a hedge against inflation. Instead, the metal entered a bear market.

“It’s like Wimbledon. When you win one year, you don’t quit; you want to win again,” he told Gregory Zuckerman in his book “The Greatest Trade Ever.”

Paulson’s first big misstep was in 2011 when one of his largest hedge funds lost 51% after wagers on a U.S. recovery went awry. It was one of the worst years of his career and resulted in clients yanking about $2 billion across his portfolios. Still, things soured even more over the next two years as he produced $9.4 billion in losses for clients.

Investors continued to pull money after the string of slip-ups, and the losses continued. After a series of wrong-way bets on drug stocks, he called 2016 “our most challenging year since inception,” in a report to investors.

Even with all of the ups and downs in his career, Paulson isn’t ready to close the book on investing.

“With one chapter closing a new one is beginning for me and I look forward to continuing as an active participant in financial markets,” he wrote in the letter.

7 comments:

  1. Fed OK’s Wall Street Wolves to Resume Risky Trading

    https://www.youtube.com/watch?v=f-eO_t-uNCc

    ReplyDelete
  2. CW,

    Eh?

    Maybe Paulson never signed up for those investment or trading course made easy by our Singaporean gurus?

    If he had, the outcome will be different?

    (Sarcasm alert in case there are bei kambings who fail england comprehension)

    ReplyDelete
  3. Covid causing breathlessness in man-on-street but headaches in pro investors. Hahaha.

    Temasek delays annual report until September, citing pandemic.

    Maybe TH still digesting new methods of trading / investing? LOL.

    Even for Jim Simon's Renaissance Technologies funds, only his secretive & private Medallion Fund is having large profits, while his other open-for-sale (only HNWIs need apply) funds are just so-so, only about 4% higher than the S&P500. Medallion fund is crushing it; his other funds? Not so much.

    Suspect the computer-driven quantitative short term trading in Medallion Fund can only be optimised for smaller account sizes. This fund has been closed to new money since 1993(!) and is operating only for Jim Simon's own money as well as money of pioneer company staff.

    ReplyDelete
    Replies
    1. Spur,

      So the secret is to have multiple funds - and shout loud loud when one of them outperforms out-of-the-park ;)

      Wait.

      This is one of the oldest trick used by trading charlatans.

      One trading account long USD, another account short USD.

      Show bei kambing students the one that made money.

      See? I consistent or what?

      Come join my Trading Mastery Class and you can be like me!

      LOL!

      Delete
  4. (Bloomberg) -- The world’s biggest pension fund posted a record loss in the first three months of 2020 after the coronavirus pandemic sparked a global market rout in the period.

    Japan’s Government Pension Investment Fund lost 11%, or 17.7 trillion yen ($164.7 billion), in the three months ended March, it said in Tokyo on Friday. The decline in value was the steepest based on comparable data back to April 2008, reducing the fund’s total assets to 150.63 trillion yen. Foreign stocks were the worst performing investment, followed by domestic equities.

    The results come just months after the fund revamped top management and revised its asset allocation to focus more on overseas debt. The loss, which wiped out gains for the fiscal year, may attract political attention as social security remains a major concern for tens of millions of Japan’s retirees.

    “The decline in domestic and foreign equities led to a negative return for the fiscal year,” said Masataka Miyazono, the president of GPIF. “Both equity markets performed strongly during 2019 even under pressures from the U.S.-China trade negotiations. The global coronavirus pandemic led to investors taking a risk-off stance.”

    Overseas bonds were the only major asset to generate a positive quarterly return. The securities gained 0.5%, compared with losses of 0.5% for domestic bonds, 18% for local equities and 22% for foreign stocks. In April, GPIF raised its asset allocation to foreign bonds by 10 percentage points to 25%, while keeping the target for foreign and domestic stocks unchanged at 25%.

    Naoki Fujiwara, the chief fund manager at Shinkin Asset Management Co., said the losses were expected. Equities have rebounded since March, so the pension fund should be recouping losses for the April-June period, Fujiwara said.“The current portfolio is exposed to equity volatility,” he said. “We’re in a low-yield environment right now, and will likely be for the next two years, so maybe it’s alright for now, but in the long run, the pension fund should correct the allocation of equities.”

    ReplyDelete
    Replies
    1. -11% for a diversified portfolio is OK ... it's 3 times less than what a 100% global equity portfolio would have gone thru. Temasek & GIC suffered much bigger losses in 2008, and I suspect in March as well.

      The important thing is holding power, and when do you need to drawdown the portfolio? Otherwise you kena the sequence of returns risk.

      Delete
  5. The best thing U can do or have in the stock market or cash rotting in the bank is Time is not a factor.

    Sorry now time is really a factor for money rotting in the Banks for interest almost zero.

    Ever wonder why stock prices very hard to dive again like in March?

    ReplyDelete

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