Photo: AP Images
We were shocked to find out that John Paulson’s investment management firm Paulson and Co. lost more money in 2011 that Long Term Capital Management lost when it collapsed in 1998.In his latest letter to investors, Paulson explains why. To put it in a nutshell, he was completely wrong about what would happen to the global economy.
From the letter:
Our performance was affected by overly optimistic assumptions and net equity exposure that was too high. At the beginning of 2011, we positions our portfolios with high levels of net equity exposure anticipating growth in the U.S. and an orderly resolution of Europe’s sovereign debt crisis. However, growth in the U.S. was anemic in the first half of the year and the European debt crisis dominated markets most of the year. Even though fundamentals for many companies in our portfolios were strong throughout 2011, as macro fears intensified, the market traded more on fear causing our event equity positions to fall. Accordingly, we reduced out equity exposure levels at the end of 2011 and begin 2012 with a more balanced portfolio.
So there you have it. Paulson bet against fear, and fear was totally hot in 2011.
Also: Reducing his equity at the end of 2011 is ominous for his relative performance in 2012.
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