A particularly volatile period has left the flagship fund at the hedge-fundfirm Paulson & Co. with nearly 40 percent in year-to-date losses, raising questions about how loyal investors will remain toward the money manager as it struggles with a prolonged rough patch.
In a performance update circulated to investors late Wednesday, Paulson officials disclosed that through Aug. 19, the domestic, leveraged version of its central fund, Paulson Advantage Plus, was down 39 percent, according to people briefed on the numbers.
The unlevered sibling to that fund, Paulson Advantage, was down nearly 28 percent, these people said.
The firm’s well-known merger funds were also down, but by far less, these people added.
Through Friday, the onshore version of the levered merger fund was down 12 percent, and its unlevered counterpart, Paulson Partners, down 6 percent. (A Paulson spokesman declined to comment on the latest numbers.)
The Advantage performance figures released Wednesday—the latest evidence of a downward spiral that has been occurring for weeks—leave Paulson vulnerable to a swath of investor redemption's, according to fund of funds managers and hedge-fund watchers. Some investors said earlier this week that they were already contemplating pulling their investments in Paulson, given the potential impact on their own overall returns.
“Once you get above a 30 percent decline, you are outside the bounds of what is acceptable by a number of investors,” says Don Steinbrugge, chairman of the hedge-fund consulting and marketing firm Agecroft Partners, “and as a result, you should experience a number of redemption's.” (Paulson is not an Agecroft client.)
Paulson & Co., founded by John Paulson in 1994 with some $2 million, became infamous for its wildly profitable bet against subprime mortgages during the 2008 financial crisis, and grew to manage $38 billion at its peak this past June. Since then, Paulson’s assets under management have sunk to $35 billion, and may be less now as a result of the recent performance.
The fund firm’s redemption policies vary according to which funds and which fee structures are involved, say people with knowledge of the firm’s policies, but the firm typically requires a 60-day notification for withdrawals before the end of a quarter.
Through late July, Paulson hadn’t received significant redemption requests for the third quarter, the firm told investors a few weeks ago, according to people who were briefed on the matter. And the fact that the Advantage fund’s troubles are deepening so close to the end of a quarter means that any new withdrawals will have to wait until the end of the year at earliest, a fact that could benefit the fund.
“John Paulson is starting with an asset base of $35 billion. And even if he does have substantial withdrawals, he is still going to be a large hedge fund and major player in the industry,” says Steinbrugge.