Paulson & Co warns of asset redemptions

Financial Times

Paulson & Co, the giant US hedge fund run by billionaire investor John Paulson, has warned that in a “worst case” scenario, it could suffer redemptions equivalent to between a fifth and a quarter of its assets by the end of the year. In a third-quarter call with investors held on Tuesday, Mr Paulson sought to play down concerns about the future of his $30bn hedge fund amid steep losses in recent months and growing fears over the health of the US economy. According to several people on the call, Mr Paulson – best known for his spectacular bets against the US housing market in 2007 – spoke strongly of his “100 per cent” commitment to continue to run his funds, none of which will be wound down.

Leverage in the firm’s Advantage Plus fund, a higher-risk version of its flagship Advantage fund is to be reduced from 1.5 to 1.15 times, however. Both funds have also had their net exposure to US markets halved from its January position. The Advantage Plus fund has lost 47 per cent of its value so far this year, thanks primarily to Mr Paulson’s bullish outlook on the prospects of the US economy. The fund dropped 15 per cent in August and 19.3 per cent in September. Mr Paulson said he would not charge fees on further investments by existing investors across his range of funds until they had regained their losses.

The firm’s investor call comes ahead of the crucial redemption date for Advantage funds at the end of this month, after which firm-wide redemptions for the full year will be known. Paulson & Co said it would not have any problem meeting outflows outlined in the worst-case scenario, which would equate to around $6bn based on current assets under management. Not all investors are currently eligible to redeem, however. The firm’s redemption profile was staggered to reduce the risk of Paulson & Co having to sell assets rapidly.

Mr Paulson has been the highest profile hedge fund casualty of 2011.

His Recovery Fund is down 31 per cent so far this year, and his Credit Opportunities Fund is down 18 per cent. Both have sustained the majority of their losses in the third quarter. Only Mr Paulson’s his $1bn Gold fund has made money this year. It is up 1.3 per cent. The losses were a “blip” on the firm’s long term track record, Mr Paulson said, but acknowledged that they were “disappointing”. Since 2009, Mr Paulson has piled into distressed US equity and bond positions in trades designed to pay off from continued US growth and expected, in many cases, to deliver triple-digit returns. While the positions paid off handsomely in 2009 and 2010, they have collapsed this year as confidence has ebbed and policymakers have struggled to solve issues such as the eurozone debt crisis.

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