The John Paulson Way to Profits

By Prieur du Plessis, on February 3rd, 2009 posted in: Investment, Markets, Money

John Paulson (unrelated to Hank, ex-US Treasury Secretary), US hedge fund manager, shot to fame last year by capitalizing in spectacular fashion on the credit crisis by, amongst others, betting against a number of financial institutions.

The scoreboard shows his flagship Paulson Advantage Fund returning 36.7% net of fees for 2008. Total assets jumped from $12.5 billion at June 1, 2007 to $28.8 billion by the beginning of 2009.

A fascinating peep behind the curtain of the investment actions of the 78^th wealthiest American on the Forbes 400 list comes to us courtesy of The New York Times’s DealBook, having obtained Paulson’s 28-page year-end report to his investors.

Paulson’s outlook for this year is summarized as follows:

“We remain bearish on the outlook for the US economy and believe that the recession will extend into late 2009 and likely into 2010. The sharp contraction in the global economy, the instability of the global financial system and the ongoing credit contraction are unlikely to be resolved in the first half of 2009. While the US stimulus package will likely cushion the decline, we don’t think it can halt the downturn and will likely have longer-term negative consequences.

“Although we are bearish on the economy, we are bullish on investment opportunities for our funds over the next year in the following areas:

• Long Distressed Mortgages
• Long Distressed Debt
• Debt Restructurings
• Bankruptcies
• Strategic Mergers
• Event Arbitrage
• Financial Recovery

“We see attractive opportunities in all of these areas. Given our favorable liquidity position and expertise in these areas, we believe we are uniquely positioned to take advantage of these opportunities in 2009 and beyond.”

Click here for Paulson’s year-end report.

Source: Zachery Kouwe, The New York Times DealBook, January 30, 2009 (hat tip: Paul Kedrosky).

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Read more on John Paulson at Wikinvest

art swayhoover

February 3, 2009 at 2:38 pm

are there any other funds that mimic paulson?

Prieur du Plessis

February 3, 2009 at 4:08 pm

Comment from Dennis Futchik:

Why have central banks not employed the simple expediency of making banks
correspondents to a governmental lending facility rather than simply
handing them cash, which has resulted in an all too predictable result?

As correspondents, banks could only generate income and benefits from
lending activities, i.e. putting money on the street.

Central banks could quickly issue conservative lending/underwriting
guidelines for making loans against any asset class, which such guidelines
have been well-established for many decades.

In this way even banks in bankruptcy would have a means to earn fee and
spread income. Banks will not hesitate to lend OPM when it does not
contribute to their own balance sheet impairment.

Creating an aggregator bank or other form of government acquisition of
troubled assets only prolongs and increases taxpayer agony and does not
replace the management regimes culpable in creating the current crisis.

Rather than wage futile wars to artificially maintain over-inflated asset
values, governments should let incompetent banks slither into bankruptcy.
Other banks could almost immediately begin injecting liquidity into the
system through correspondent lending activities.

Thank you for providing this wonderful forum.

PS: I would require banks to put perhaps 20 percent or so of their own funds into each facility, while allowing them to earn fees and spreads on the whole amount.

Future Generali

February 6, 2009 at 11:37 am

Thanks for this very informative post. This is a nice blog and will be looking forward to read more from you.

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February 7, 2009 at 2:49 pm

[...] 1. The John Paulson Way to Profits – Posted by Prieur du Plessis – John Paulson, US hedge fund manager, shot to fame last year by capitalizing in spectacular fashion on the credit crisis by betting against a number of financial institutions. A fascinating peep behind the curtain of his investment actions comes to us courtesy of DealBook, having obtained Paulson’s 28-page year-end report to his investors. – Investment Postcards from Cape Town [...]