Traders are viciously anticipating John Paulson‘s liquidation of some of his holdings, according to the Wall Street Journal.Paulson’s returns have been terrible, and as the October deadline for investors to ask for redemptions inches closer, traders are avoiding his holdings in anticipation of big investor liquidations.
And in at least one case (Harrah’s), when a Paulson holding hit the market, traders “reached out to brokers to see if they can buy more of it” — a way to see if Paulson is liquidating, which would cause more of his holdings to sell off.
Billions in redemptions at Paulson & Co would cause him to sell of big chunks of stock because he doesn’t own very many. That will hurt the stock price of those investments. So of course traders would want to anticipate this.
The interesting thing is this. There is one sign that Paulson might be selling a small portion of his holdings – but it’s not a large amount. His brokers might have tried to find Paulson a bid on $2-3 billion of Lehman debt.
After Paulson sold $100 million worth of Lehman debt several days ago at prices close to market levels, a number of brokers at large investment banks began reaching out to a number of large investors, including hedge funds, to test their interest in $2 billion to $3 billion of Lehman debt held by Mr. Paulson’s firm, say people close to the matter. They said they were told it would cost about $500 million to buy this debt.
A $2-3 billion offloading could be Paulson’s moving more into cash. He bought the bonds at 10 cents on the dollar, and now they’re trading at about 25 cents on the dollar. So if he sold $2 billion of them, he’d be up about $300 million.
However, this could be about redemptions. Or it could just be Paulson testing the waters, anticipating redemptions at his own firm closer to October. Or it could be nothing. (Are his mining holdings getting crushed now too?)
What’s bad news for Paulson is that if he does see more redemptions closer to August (redemptions at the fund look normal so far), it looks like some of them will cost him money to sell (according to the WSJ, he’s already received at least one lower than market bid – though he didn’t take it) which will cause him more pain. He is surely aware of this.
The story also shows that everyone looks to Paulson as a market-maker, though the size of Paulson’s entire portfolio alone would have the same effect on anyone.
Via Reformed Broker
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