John Paulson’s eponymous hedge fund Paulson & Co is 20 years old this month, so the mid-year review held in London this year included a breakdown of what the hedge fund has accomplished during that time. The firm has $21.5 billion in assets under management, broken down as roughly $8 billion in M&A strategy funds, $6 billion in credit funds, $3 billion in recovery, and $4.3 billion in Paulson’s Advantage funds. Paulson Partners LP has been up for 18 of the last 20 years, including the strong positive returns during the last two downturns that really made Paulson famous. The firm has better returns than the S&P 500 (INDEXSP:.INX), but it also has lower volatility and a smaller maximum drawdown over its lifetime.
Monthly merger deals at highest point in five years
While he’s probably best known for betting against the sub-prime mortgage market before it crashed, Paulson is seen as a merger arbitrage specialist, and he sees growing opportunities M&A strategies this year. M&A activity hit its highest monthly level in five years in April with $418 billion in announced deals, and he sees more attractive spreads starting to show up, highlighting four that are particularly attractive.
The spread per share of the Time Warner Cable Inc (NYSE:TWC)/ Comcast Corporation (NASDAQ:CMCSA) (NASDAQ:CMCSK) deal fell by more than half back in February, but it has crept back up since then and with an estimated closing date in early 2015 it could climb higher. Even with the spread that currently exists the deal offers an 8.8% annualized spread.
Paulson has taken a long position on Allergan, Inc. (NYSE:AGN), which received an unsolicited takeover offer from Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX) that Allergan is so far resisting. Valeant says that it has enough votes to force a special meeting, but it’s not yet clear if it will be able to drum up enough support to force a sale. Most of the distance between the Valeant’s offer and Allergan’s stock price disappeared in April, but there’s still a $13 per share spread, and as the fight goes on there is likely to be some more volatility in spread.
A more controversial deal is the proposed merger of drug companies Mallinckrodt PLC (NYSE:MNK) and Questcor, which gets nearly all of its revenues from a sixty-year-old drug called Acthar. The short interest is being driven by doubts surrounding Acthar and allegations that adverse effects are building up and threatening Questcor’s profitability. Despite that short interest Questcor Pharmaceuticals Inc (NASDAQ:QCOR)’s share price has been on the rise and the current per-share spread is down to $9.
Finally, Paulson’s presentation shows different returns for the DIRECTV (NASDAQ:DTV)/ AT&T Inc. (NYSE:T) deal based on the amount of hedging and the volume-weighted average share price of AT&T, but anyone who hasn’t already taken a position on this deal will have to reevaluate soon since Congress is about to weigh in on the deal.
Paulson & Co’s other strategies well below annualized lifetime levels through May
The presentation also broke down performance for the other funds managed by Paulson & Co through the end of May. The Paulson Recovery fund, which is heavily invested in financials, had a blistering 2013 but has had low single-digit growth through May, compared to an annualized lifetime return of about 12.6%.
The Paulson Advantage Ltd. fund is down 2.49% this year through the end of May, having been hammered by investments in hotels and real estate that cost it 2.64%, almost entirely wiping out the 2.88% gains from gold event investments. Energy and distressed debt investments were up about 1% apiece, but every other investment category was either flat or negative.
Paulson Credit Opportunities has also had a slow year, at least compared to its annualized returns north of 40%. Paulson Credit has had incredible success since inception, but it has come in fits and starts with relatively flat periods in between (and one sharp decline), so long-time investors probably aren’t concerned about a few slow months.