Andrew Lo: This Chart Is The Reason John Paulson’s Performance Is Down This Year

The ultimate bubble

At a talk for financiers on Wednesday, Andrew Lo, an MIT researcher and fund manager, explained why everyone, including John Paulson, is having so much trouble making money right now.”Alpha is becoming beta,” he said.

He showed the audience this chart (to your right) and asked the audience, what do you think this is a chart of?

One person asked, “Housing prices?” The audience laughed.

“Inverse housing prices?” Less laughter.

“It’s the population from 10,000 B.C. to today. No other species has a population growth chart that looks like this,” said Lo. (The full chart is below.)

It happened because “we have always taken technology and exploited it,” he explained. We take the world’s resources and we squeeze them in order to make enough to sustain all of these people and we do it for one reason. To make money.

He used John Paulson as an example why more people means that alpha is becoming beta.

“Paolo Pelligrini helped Paulson make his big bet against the housing market,” he explained. “And what happened is, Paulson made an obscene amount of money that year. I think he made $1.9 billion. And I’m I’m guessing that Pelligrini, on the other hand, only made about a disgusting amount of money. So he left Paulson to start his own firm.”


“And what used to be a unique strategy now becomes 2 people with the same strategy. Paulson’s alpha becomes beta.”

Another difficult factor, said Lo, is that Paulson manages so much money. He manages $39 billion, said Lo, so he can’t deploy all of it on unique strategies. 

That might explain why Paulson’s returns were less stellar last year (he was up between 10%-26% in 2010; this year his Advantage fund is down 3.5%), but it also explains why his gold denominated fund is a genius strategy of its own. Paulson & Co doesn’t have investors’ money invested in gold, he has given them the option for their invested money to be denominated in gold, instead of dollars. Only 5% of Paulson & Co is actually invested in gold, like the gold miner Novagold. His was the first fund to do that. Investors whose Paulson assets are denominated in gold rose 35% in 2010.

We would also offer that Lo’s theory explains more why Pelligrini shut his fund – because Paulson had much more money than Pelligrini to deploy on his strategy. And that his theory doesn’t explain Bridgewater’s insane year of performance.

One of Ray Dalio’s Bridgewater funds, the $34 billion Pure Alpha fund (Bridgewater has $86 billion AUM in total), returned an incredible 38% last year. Big hedge funds can always point to Bridgewater if investors question if their size is too big.