Paolo Pellegrini, an architect of the most lucrative bets on the housing bust, is dramatically paring back his hedge fund, according to someone familiar with the matter.
In a letter issued Friday morning, Pellegrini, 53, told investors in his hedge fund, PSQR Capital, that because “substantial additional work” was needed in order to profit from his investment thesis, he planned to return their money to them by September 30. The plan was first reported by Absolute Return magazine.
Going forward, Pellegrini will trade on a smaller scale, largely with his own money, the person familiar with the matter said. Pellegrini didn’t respond to a call for comment.
By money-management standards, PSQR, which managed significantly less than $1 billion, was not a significant player. But Pellegrini, who helped orchestrate hedge-fund manager John Paulson’s winning bet against the subprime market, had the benefit of a high-profile pedigree.
In 2006, Pellegrini began looking into U.S. housing data at his boss’s behest. Believing that the subprime market was headed for the rocks, Pellegrini helped Paulson enter into a series of credit-default swap purchases, which amounted to a big short bet on subprime—a maneuver that ultimately created tens of billions of dollars in gains.
As Paulson’s assets under management skyrocketed, Pellegrini was rewarded handsomely; for 2007 alone, Pellegrini’s year-end bonus was $145 million, according to the Wall Street Journal.
But Pellegrini also attracted attention for his involvement in a particular trade: Paulson’s bet that a package of loans tied to a Goldman Sachs product called Abacus 2007-AC1 would sink in value.