The Fading Fortunes of John Paulson

John Paulson (Trades, Portfolio) was once a darling of Wall Street, having handsomely profited because of his smart bets on the subprime crisis while many of his counterparts suffered.

Today, though, he’s struggling, after experiencing three successive years of double-digit losses. What was a $36 billion portfolio six years ago now struggles to get over the $10 billion mark

Paulson is listed as one of the GuruFocus gurus based on his big scores of the previous decade, but can he maintain that status?

To read about other investing gurus, click on any of the following names: David Tepper, Prem Watsa, Bill Ackman, Seth Klarman (by Rupert Hargeaves), Chuck Akre, Vanguard Health Care Fund, Yacktman Focused Fund, Jerome Dodson, Frank Sands, the Eaton Vance Worldwide Health Sciences Fund, PRIMECAP Management, Daniel Loeb, Bill Nygren, Mariko Gordon, David Rolfe and Mairs & Power.

Who is John Paulson?

He graduated from Harvard in 1980 with a Master of Business Administration after completing an undergraduate degree in finance at New York University’s College of Business and Public Administration in 1978.

A few years later, he became a general partner at Gruss Partners and a managing director in mergers and acquisitions at Bear Stearns. In 1994, he launched his own hedge fund firm – Paulson & Co. Inc. – in New York City.

Paulson became famous (or infamous, in some eyes) with a $15 billion win on the mortgage and financial crisis of 2007 and 2008. The story of his exploits is chronicled in the book, “The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History” by Gregory Zuckerman.

That success brought large sums of capital into his fund, which subsequently became a giant in the industry. However, recent years have produced more losses than gains, with poor performance costing him both capital losses and clients. The New York Times reports Paulson now (at the date of publication, May 1) manages less than $10 billion, compared with more than $36 billion in 2011. Last year, 2016, was so bad that he and his fund were included in a Fortune magazine article titled “These Are the 7 Biggest Hedge Fund Disasters of 2016.”

The Times also reports the fund manager is close to the Donald Trump administration, with Paulson having been one of the first Wall Streeters to back Trump, as well as providing economic advice, making a quarter-million-dollar donation to the inaugural committee, and participating in a “CEO Town Hall.”

Measuring up to past greatness can be a curse, even for hedge fund managers who post respectable results. But Paulson failed to bring in even modestly respectable returns in recent years, making it more difficult to keep existing clients and attract new ones.

What is Paulson & Co. Inc.?

This is an investment advisory firm, also known as a hedge fund, based in New York City.

According to its Form ADV filed with the U.S. Securities Commission in April of this year, more than 75% of its business is done with pooled investment companies, or institutional investors (such as mutual funds and pension funds). It also invests on behalf of some high net-worth individuals, banks/thrifts and other entities. Specifically, it reports having 11 to 25 clients in the most recent fiscal year with 60% based outside the U.S.

Regulatory assets under management totaled $12,443,210,000, managed on behalf of 17 clients. But Paulson and key associates may be the biggest holders of that total, according to this statement on the 2A portion of the Form ADV: “Paulson employees and partners are currently the largest category of investors in our funds on a firmwide basis.”

The phrase “largest category” is not defined, but Forbes puts Paulson’s personal wealth at $7.9 billion, and no doubt a portion of that is managed by the firm.

The firm manages a lengthy list of funds across several categories, as detailed in Form ADV Part 2A:

[Copyright By Robert Abbott]

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