Wednesday, September 28, 2011

From Penthouse to Outhouse - Investors Want to Avoid Holding what John Paulson Holds in Front of October Redemptions

Let me preface this by saying, there is no reason to shed tears of John Paulson - he made $5B last year alone (not his fund, but personal wealth) and I believe now is worth somewhere around $15B.  [Jan 28, 2011: WSJ - John Paulson Bests $4B Gains of 2007, with $5B Year in 2010]   So he'll be ok, no matter what happens here in the next few months, or if he has a terrible year.  But performance this year [Aug 10, 2011: John Paulson's Main Funds are Down 21% and 31% YTD], and stories like this in today's WSJ shows how quickly the worm can turn.  Worries about some serious investor redemptions at the end of October, are causing a ruckus it appears.

Paulson has been nearly giddy on economic prospects the past year (strangely), and a big proponent of the banks in particular.  [Aug 26, 2009: Citigroup Surges on John Paulson Investment] [Aug 12, 2009: John Paulson Makes Bank of America 2nd Largest Holding after Gold]   Due to a once in a lifetime bet during the subprime crisis he has worldwide cache, and his movements are followed very closely.   That said, managing a mega huge fund is very difficult and some wondered if unlike Bridgewater Associates, size would get in the way of performance.  [Mar 29, 2010: Are John Paulson's Hedge Funds Now Too Big to Outperform]  I think it has more to do with his economic outlook (which was wrong) and his areas of emphasis (some of the worse performing groups ex gold).  He also was hit by a now infamous China company scandal.[Jun 21, 2011: John Paulson Takes Potential $720M Loss in Sino Forest]


Via WSJ:

  • As the hedge-fund manager suffers through the worst losses of his career, Mr. Paulson now is facing a flock of vulture investors who hope he will be forced to conduct a fire sale of stock and debt holdings.  Rival hedge funds, brokers and other firms are combing through Paulson & Co.'s investments, trying to anticipate what Mr. Paulson might sell if he needs to return cash to investors.
  • According to traders, some firms have been selling investments they have in common with Mr. Paulson, worrying he will have to sell some holdings if clients withdraw cash.
  • Meanwhile, other firms are approaching Mr. Paulson with lowball offers. For example, at least one firm recently offered a below-market price for some of the bonds his firm owns in Lehman Brothers Holdings Inc., according to people close to the matter. Lehman filed for bankruptcy in 2008, but debt issued by the securities firm is still traded.
  • So it goes on Wall Street when a high-profile investor comes under pressure. As word seeps out, rivals are often eager to find ways to profit—or at least avoid losses—from a competitor's misfortune.
  • Earlier this year, Mr. Paulson held such sway that when he bought an investment, others quickly followed, sending prices higher. His recent bullishness has stood out amid the market's gloom.
  • But because two of Mr. Paulson's largest hedge funds have suffered losses of more than 20% so far this year, through August, some traders believe it is a matter of what—not if—he will be selling.
  • Most of Mr. Paulson's investors must inform him by the end of October if they want their money back by year-end. For now, the requests have been in line with recent quarters, according to someone familiar with the matter.
  • And while brokers say the hedge-fund firm has done some selling in recent days, people close to Mr. Paulson stressed the firm isn't selling the bulk of its debt and equity holdings  "People are looking over his portfolio. There are constant conversations about what he owns," said one hedge-fund trader. "People are avoiding his names or trying to get in front of them."

There are some pretty interesting examples in the remainder of the story - but some days when you wonder why the stock you own is acting berserk, you really realize what a small mite you are in this world.  Circumstances completely out of the norm may be affect you - for example:
  • Shares in Lear Corp., where Mr. Paulson's firm owned a 4% stake as of June 30, also sank 12% last week. A hedge-fund manger who owns the stock said he thought its underperformance was tied to suspicions Paulson might sell.

[Jun 6, 2011: John Paulson's Funds have Rough May]
[Jan 31, 2009: Dealbook - John Paulson's Year End Review]

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