Hedge Funds

Despite Losses, Investors Stick With Paulson Fund

Azam Ahmed and Julie Creswell|The New York Times

John A. Paulson, the billionaire hedge fund manager who made his fortune betting against subprime mortgages, has been fodder for Wall Street gossip as rivals wondered whether investors would bolt after suffering staggering losses this year.

John Alfred Paulson, president of Paulson & Co., Inc.
TimSloan | AFP | Getty Images

At least for now, pensions, endowments and wealthy individuals are standing by their money manager. Redemption requests, which were due by Oct. 31, totaled less than 8 percent of assets, or roughly $2.4 billion, according to a letter that Mr. Paulson sent to investors on Tuesday.

It’s a rare feat for a hedge fund . When returns sink by as much as 50 percent — as one portfolio did at Paulson & Company — investors typically flee at the first opportunity.

But Mr. Paulson has built a reservoir of credibility, largely through past performance and marketing efforts.

Longtime clients are still giddy from 2007, when one credit-focused fund gained 600 percent amid the broader market downturn. Newer institutional investors that have lost millions, like public pensions in New Mexico and Missouri, figure returns will bounce back. Some are even pouring additional money into its funds in anticipation of a turnaround, money that will help offset some of the withdrawals.

“We still have a very high conviction that long-term Paulson is a very good investor,” said Jon Sundt, the chief executive of Altegris in La Jolla, Calif., an investment manager that oversees $3 billion. “We have had some investors who have been adding to their investments in Paulson.”

Still, Mr. Paulson, who is set to report positive monthly returns in a few days, is in a precarious spot. Since employees account for half of the fund’s overall assets, the recent withdrawals amount to nearly 16 percent of the outside capital. And the firm is also attracting new money mainly by offering a break on fees to existing investors, rather than by cultivating new clients.

Should returns remain in the doldrums, some big clients have indicated they will withdraw their money. The next deadline to withdraw from most funds will be next year.

Mr. Paulson’s spectacular fall has been watched as closely as his impressive rise.

The soft-spoken son of a corporate finance executive, Mr. Paulson, a former investment banker, ventured out on his own in 1994. Over the years, he produced steady gains, returning an average 16 percent a year in his oldest fund through 2006. He entered the big leagues in 2007, earnings billions of dollars betting against subprime mortgages.

Since then, investors have plowed money into his firm, encouraged by consultants like Cliffwater Associates and banks like Morgan Stanley and Bank of America Merrill Lynch . At the start of the year, Paulson & Company oversaw $38 billion compared to just $4 billion in 2007.

Some industry players have complained that Mr. Paulson has shown little restraint in his fund-raising efforts, amassing assets at the expense of performance. His marketing team boasts a staff of more than two dozen professionals, higher than many large hedge funds. And he also has separate teams devoted to different types of investors, including endowments, foundations and pension funds.

The firm started to show cracks this year. Mr. Paulson lost $500 million on Sino-Forest, a Chinese timber company accused by an analyst of running a vast Ponzi scheme. His stakes in Bank of America, Citigroup and Hewlett Packard — part of a bullish call on the economy — have also withered.

He conceded to investors in October that he “made a mistake.” The Advantage Plus fund is off 47 percent through September. To climb out of that hole and start charging lucrative performance fees, the fund will need to post least 100 percent. Other funds like Advantage and Recovery will have to notch returns of at least 60 percent to get above water. The losses are so significant that some competitors joke Mr. Paulson would need to pull off a Hail Mary, with returns on par with the subprime play.

Investors who have recently met with the money manager say his usual swagger has diminished, and he appears worn. Last month, protesters at Occupy Wall Street focused on his Upper East Side townhouse. He responded in a statement, that “instead of vilifying our most successful businesses, we should be supporting them.”

Despite the reversal, investors are largely remaining patient. Some are loath to sell their positions in Mr. Paulson’s funds at their low point. Other big institutions are willing to stick by the money manager given the proven team and strong record.

“With a fund of our size, we are going to constantly have investments that do very well and those that don’t,” said M. Steve Yoakum, executive director of the $30 billion Public School & Education Employee Retirement System of Missouri, which has $118 million with Mr. Paulson. “One of the biggest differences between institutions and private investors is the tendency to sell when things are bad.”