We’ve defended John Paulson in the past when it’s been suggested that after his amazing bet against subprime the bloom had come off the rose.
After all, you can’t just repeat making the biggest bet of all time year after year. It’d be fine if he never in his career had a period like 2007-2009.
But now that we know how poorly his fund is doing in 2010, it’s worth revisiting the John Paulson question, and consider a few things.
- To some extent, his investing strategy is very “normal.” He’s been bullish on financials and gold? Well, so has just about every other marquee hedge fund name.
- The one area where he has stuck his neck out, and really try to differentiate has been housing (he’s a bull), but it just hasn’t worked, and appears to have been a major contributor to his poor performance.
- Meanwhile, even his legacy has been singed, as people learn more about what it took to pull off his big subprime short. There’s certainly a belief that he did well because Goldman stacked the deck in his favour. We’re sceptical of that, but that’s kind of irrelevant. People believe it.
Prior to his big bet, Paulson was a merger-arbitrage guy, who saw something coming in the housing market, but clearly benefited from a tremendous amount of luck with respect to timing. He certainly wasn’t the first to think that the housing bubble was going to burst at some point last decade. Others tried and failed to bet against it, going busto along the way.
Unless Paulson has a rabbit left in his hat, and can somehow separate himself from the hedge fund pack again (to the upside), then his reputation will certainly go down several notches. Add to the fact that he’s now the biggest hedge fund manager in the world — an issue that’s disconcerting to investors who worry about the law of large numbers and an inability to be nimble — and the case for investing with him gets weaker and weaker.