John Paulson, the billionaire hedge fund manager who foresaw the collapse of the US housing market, is shorting German government bonds in a wager that the euro zone debt crisis will significantly deepen in the coming months.
Tim Sloan | AFP | Getty Images
John Alfred Paulson, president of Paulson & Co., Inc, listens during the House Oversight and Government Reform Committee November 13, 2008 in Washington, DC.
Mr. Paulson told investors in a call on Monday that he was betting against the creditworthiness of Germany, regarded in markets as among the safest sovereign borrowers, because he saw the problems affecting the euro zone deterioratingseverely, said a person familiar with Mr. Paulson’s strategy.
The 56-year old hedge fund manager, who oversees $24 billion at his New York-based firm Paulson & Co, believes that problems for the Spanish government will spill over to threaten the stability of the euro zone as a whole.
While Spanish bond yieldsthis week rose to multi-month highs above 6 percent, German 10-year Bunds yields have recently traded as low as 1.66 percent, within a whisker of record lows.
Mr. Paulson’s position, which includes holdings of credit default swapswritten on German debt, has been in place for several months.
A spokesperson for Paulson & Co declined to comment.
Broad details of the positions came as part of a quarterly call to reassure investors of his funds’ recent progress, according to a client of the firm.
Many Paulson & Co clients were rattled last year by steep losses across Mr. Paulson’s range of funds. His flagship Advantage plus fund dropped 51 percent in value, wiping out billions of investors’ money.
Mr. Paulson said the firm had instituted new risk management measures, including committees to meet regularly and discuss exposures, to help improve its management of money in the future.
In spite of 2011’s losses, Mr. Paulson’s longer-term track record is still among the best in the $2 trillion hedge fundindustry.
Paulson & Co has been closely watching Spanish banks for many months now, and was initially rumored to be a potential buyer of stakes in several.
Analysts at the hedge fund firm have noted the rise in borrowing from Spanish lenders from the European Central Bank this year, as well as questions over the Spanish government’s resolve to tackle its fiscal difficulties.
Mr. Paulson’s bearish view is shared by the head of world’s largest hedge fund manager, Ray Dalio, whose Bridgewater Associates recently issued a note to clients saying that Spain was worse off than it was last year.
Mr. Dalio believes more government debt restructurings, such as that experienced by Greece, will need to be instigated for European sovereign borrowers.