John Paulson’s fall from hedge fund stardom

Alexandra Stevenson & Matthew Goldstein
John Paulson
Fred R. Conrad | The New York Times

John A. Paulson is one of the best-known names in the hedge fund industry. But these days, Mr. Paulson is having more success in the political realm than he is managing his business.

Mr. Paulson, 61, was one of the first people on Wall Street to back Donald J. Trump's bid for the presidency. He counseled Mr. Trump on economic matters during the campaign. He gave $250,000 to Mr. Trump's inaugural committee. And he recently visited President Trump at the White House for a "C.E.O. Town Hall."

But his investors are unlikely to be impressed by his political access. His firm, Paulson & Company, has recorded nearly double-digit losses in several of its larger funds as of the end of March.

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That dismal record is a far cry from nearly a decade ago, when Mr. Paulson made nearly $15 billion betting on the collapse of the housing market. Back then, state pension funds and investors around the world rushed to give him their money to manage. Even Mr. Trump became an investor with Mr. Paulson — and eventually lost money.

Mr. Paulson's struggles come after a gut-wrenching 2016, when he recorded even steeper losses in those funds, partly because of several wrong-footed bets on drug makers, including the troubled Valeant Pharmaceuticals. That followed a painful 2015, when investors first balked and began pulling their money from his firm.

A representative of Mr. Paulson declined a request for an interview with him. His funds are said to have performed better in April, said a person with knowledge of the firm who spoke on the condition of anonymity.

Despite his mounting losses, there is little indication that Mr. Paulson, who donated $400 million to Harvard University's school of engineering in 2015, is throwing his hands up and walking away.

"It is clear that Paulson has dug in with both heels and committed to steering the firm through this period," said David Black, founder of Quadra Advisors, a recruiting firm for hedge funds and other investment firms.

Nonetheless, his assets under management continue shrinking. Paulson & Company manages just under $10 billion today, down from $36 billion in 2011. Nearly two years ago, some Wall Street banks began to recommend that investors redeem some of their money from the firm.

And while Mr. Paulson is not the only hedge fund manager to see large investors pull their money in recent years, he has become a symbol of what some pension funds have taken issue with for the industry at large: big fees for little reward and little originality.

Mr. Paulson has remained upbeat with investors, according to two people who have seen recent investor letters but spoke on the condition of anonymity.

"While we are disappointed in performance in 2016, we believe we have a path to a recovery," Mr. Paulson told investors in one letter.

But it has not been smooth sailing. In another letter to investors of a merger arbitrage fund that declined by 49 percent last year, Mr. Paulson called 2016 "the most challenging year since inception." In May, Mr. Paulson will address his investors at a meeting in London at Claridge's Hotel in London.

Mr. Paulson's fall from stock-trading stardom underscores a common disclaimer in industry parlance: Past performance is no guarantee of future returns.

In early 2007, Mr. Paulson, who started his firm in 1994, was still a relatively unknown hedge fund manager. A former Bear Stearns investment banker, he had a reputation for running a solid if boring hedge fund that made bets on the outcomes of various mergers and acquisitions.

But as the housing market began to show signs of overheating, Mr. Paulson had a hunch that home loans to borrowers with spotty credit histories — which were ballooning at the time — were about to go sour. He positioned his firm to benefit in the event of a huge failure of the subprime mortgage market.

It was a bet that few were willing to take, but one that resulted in a major payday for him and his firm, and was later referred to as "The Greatest Trade Ever," in a book by the reporter Gregory Zuckerman.

After the financial crisis, investors flocked to Mr. Paulson's firm, which is in Midtown Manhattan, a stone's throw from Rockefeller Center.

For several years, Paulson & Company continued to make money for some of his investors, but the performance increasingly grew bumpy. This was particularly true for the firm's flagship Advantage fund. It lost 36 percent in 2011 and plunged another 14 percent in 2012, but rallied to post a 26 percent gain in 2013, according to an HSBC industry report and people with knowledge of the firm's performance. The losses were amplified in Advantage Plus, a version of the fund that uses leverage to enhance returns.

Over the last three years, Advantage has consecutively recorded double-digit losses. Some of Mr. Paulson's merger funds, credit funds and gold funds have posted positive returns, but the overall picture has not been pretty.

But Mr. Paulson soldiered on and even began to raise money in 2015 for a private equity fund and one focused on health care stocks.

Health care bets, in particular those on pharmaceutical companies, have proved especially punishing for Mr. Paulson and his investors. Losing wagers on economic recoveries in Greece and Puerto Rico haven't helped.

The Valeant trade resulted in a nearly $2 billion loss for the firm — bad, but not as disastrous as it was for another famed investor, William A. Ackman, whose firm Pershing Square Capital Management lost $4 billion on Valeant.

Some of Mr. Paulson's top talent have moved on. Putnam Coes, his former chief operating officer, left the firm in September. Soon after, John Reade, a senior vice president who was based in London, left.

Despite his losses, Mr. Paulson is still making new and speculative investments. In November, Paulson made an investment in Didi Chuxing, a fast-growing Chinese ride-hailing firm that signed a deal to acquire Uber Technologies' operations in China.

One bright spot could be a bet on Fannie Mae and Freddie Mac.

Steven T. Mnuchin, the Treasury secretary, has pledged to return the mortgage finance giants to free-standing publicly traded companies, a development that could make Mr. Paulson's funds big profits. Mr. Paulson and Mr. Mnuchin, a former hedge fund manager, once worked together to pull OneWest Bank out of the wreckage of IndyMac, a lender that the federal government seized in 2008.

Several new funds the firm has started are posting positive returns, too.

"We remain confident in the long-term relationship we have with Paulson," said Christopher Zook of CAZ Investments, a Texas wealth management firm that recently rotated out of the poorly performing Paulson Special Situations fund into a newer Paulson fund.

And Mr. Paulson and other hedge fund managers stand to be big beneficiaries of Mr. Trump's plans to slash taxes.

Yet 2017 is shaping up as another rough one for Mr. Paulson. The Advantage fund was down 9.7 percent as of the end of March and the Partners Enhanced fund continues to sink — falling just over 8 percent after last year's 49 percent plunge.

Even after several years of losing money for his investors, Mr. Paulson remains one of the richest men in the world — with a net worth of about $7.9 billion, according to Forbes.

But, as the financial magazine recently noted, he is now $2 billion poorer.