Since he shot to fame by betting on the collapse of the US housing market nearly ten years ago, John Paulson and his Paulson Co hedge fund has struggled to hold on to the billions he made for himself and his investors by making one of the most audacious bets in history.
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At the peak of his fame in 2011, Paulson Co managed $38 billion, half of which belonged to outside investors. However, since this high water mark, assets have collapsed and at the end of June Bloomberg reported that the firm’s fund’s under management have declined to around $10 billion, around $2 billion of which belongs to clients, the rest is Paulson’s own money.
In an attempt to turn performance around, it has been reported that at the end of July, Paulson decided to close a two-year-old Paulson & Co long-short equity fund managed by Guy Levy. Founded in 2015 with seed capital of $500 million, the long-short fund was the first of Paulson’s hedge funds not to be managed by the billionaire founder.
Paulson Co wants to refocus on its core business, merger-arbitrage, the strategy Paulson originally founded the firm on in 1994. But even though the firm has specialized in merger arbitrage for more than two decades, it’s struggling to provide a return for investors in the current environment.
Paulson Co biggest positions
According to documents seen by ValueWalk, the Paulson Merger Arbitrage strategy lost 23.6% in 2016, and for the year to May 31, the strategy was down 5.1%. Over the 12 months to May 31, investors have lost 12.6% net of fees.
At the time of the letter, the largest detractor from the portfolio were Government Sponsored Enterprises—Fannie Mae and Freddie Mac. Paulson believes it’s likely a resolution will emerge for these two businesses before the end of 2017, so is holding out for gains.
Specifically, he writes:
In Fannie Mae and Freddie Mac, our view is that the net worth sweep will not likely change until there is a broader plan in place to recapitalise the entities. We believe there is considerable upside to our holdings despite potential volatility and a high probability of a resolution before the end of 2017.
A position in Allergan also cost the fund after the stock fell following Q1 earnings.
Paulson holds significant positions in the pharmaceutical sector. Alongside Allergan, he owns Teva, Mylan and Endo Pharmaceuticals. Unfortunately, the selloff in Teva, Mylan, and Endo has only accelerated since the end of May. Year-to-date shares in Teva are now down 52%, Mylan is down 14%, and Endo has slumped 53%.
Considering these losses, even going back to basics might not save Paulson now.