John Paulson, one of the most watched hedge fund managers, is trying to bounce back from his firm’s poor performance. Paulson & Co.’s assets have declined about 50 percent from $38.1 billion in February 2011, to approximately $19 billion now. There have been many investor redemptions. Even the big investors, such as Citigroup Inc. (NYSE:C), Bank of America Corp (NYSE:BAC), and Morgan Stanley (NYSE:MS), have either pulled Paulson off their platform, or have threatened to do so. His flagship Advantage Plus fund is down 19 percent this year.
After such a horrible performance, most of the hedge funds go bust. So, how is Paulson still surviving and planning to revive the firm? Paulson rose in fortune and fame after betting big against the subprime mortgage crisis in 2007. That year his Advantage Plus rose 163 percent and his credit fund jumped 591 percent.
We did our research to find out what still keeps the Paulson & Co. afloat. The primary reason is that approximately 60 percent of the firm’s capital has been put up by Paulson himself and his partners. And only 31 to 32 percent of the assets are from institutional investors. A source revealed that the hedge fund’s size before the performance decline and heavy percentage of capital from the employees have insulated Paulson & Co. from the detrimental effects of performance declines, and subsequent client redemptions.
Additionally, Paulson gives only a few chances to his investors to pull their capital out of the hedge fund in a year. If an investor wanted to do so in June, they should have notified Paulson & Co. by mid-May. It allows the money to stay longer in the fund.
“Given the success he had [in 2007], [Paulson] is going to have a longer leash than other managers. But at some point, every investor has to decide to lock away if they don’t see it coming again,” says Nick Bollen, a finance professor at Vanderbilt University.
Paulson, who is now bullish on gold, earlier made money for his investors by predicting the takeovers. We know that nothing moves a stock up better than an unsolicited takeover bid. Prices immediately jump 30%, 40%, or even 50% after the offer. Remember how the shares of Motorola Mobility rocketed 58 percent after Google’s Inc (NASDAQ:GOOG) offer to acquire it in August 2011?
Paulson was shrewd enough to identify the takeover targets before the offer is made. Then he would patiently wait until after the acquisition offer is announced publicly. Then sell off the position at increased prices. Yes, you too can make big money, if you are good at guessing it right.