Warning: if you are having a bad day in the markets you might not want to read on any further. If you had a miserable year last year, you also might want to skip past this item in favour of all our other articles about people who are losing money just like you. Because the subject of this article is a guy who did really, really well last year.
We’re talking, of course, about John Paulson. He’s the incredibly prescient guy who made a fortune shorting the mortgage industry in 2007. And last year he did it again, largely by shorting financials.
Some highlights from the 20-page annual report for Paulson & Company that was obtained by the New York Times. (You can read the entire report here.)
- Paulson Advantage Plus, a levered fund with roughly $7 billion in assets, went up 37.6 per cent. That’s after fees. How did it do so well? Mostly by better against large financial firms, including Fannie Mae and Freddie Mac.
- The non-leveraged version of the fund Advantage fund gained about 24 per cent.
- Paulson’s merger arbitrage funds were all up, with the largest up 12.55 per cent. How could Paulson clean up in merger arbitrage in a year when so many deals went bad? By being very careful about which deals it be on. The biggest bet was that InBev’s bid for Anheuser-Busch would go through. Paulson eventually became the largest single shareholder of Anheuser-Busch stock. That resulted in the largest return from a single investment Paulson has ever made.
Of course, no one is perfect. Several investments lost money. Which ones? Basically, the long portfolio. Paulson, it seems, just wasn’t negative enough.
So what’s next for Paulson? Here’s how DealBook describes it:
The biggest opportunity Mr. Paulson sees this year is in buying distressed debt and the firm has targeted about half the Advantage Fund’s assets to that strategy. His firm’s two credit funds were up about 19 per cent and 16 per cent respectively last year as they resisted the temptation to buy distressed debt such as mortgages and leveraged loans even though they were trading at what appeared to be attractive prices.
“We remain bearish on the outlook for the U.S. economy and believe the recession will extend into late 2009 and likely into 2010,” Mr. Paulson said in the letter. “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.”
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