John A. Paulson, that Midas of the subprime era, has done it again.
Two years after Mr. Paulson pulled off one of the greatest trades in Wall Street history, with a winning bet against the overheated mortgage market, he has managed to salvage a poor year for his giant hedge fund with a remarkable come-from-behind showing.
Defying those who said his subprime success was an anomaly, Mr. Paulson appears to have scored big on bets he made on companies that would benefit from an economic rebound.
In less than three months, his flagship fund, the Paulson Advantage Fund, has turned a double-digit loss into a double-digit gain. At mid-December, the fund, which was worth $9 billion at the start of the year, was up about 14 percent, according to one investor in the fund who provided confidential figures on the condition of anonymity.
It is a remarkable turnabout for Mr. Paulson, whose winning gamble against the housing market plucked him from obscurity and transformed him into one of the most celebrated money managers in the business.
What precisely propelled the sharp rebound in Mr. Paulson’s hedge fund is unclear. A spokesman for Paulson & Company declined to comment, and regulatory filings of significant changes made to Mr. Paulson’s funds typically lag behind by several weeks.
But it is clear that several of Mr. Paulson’s largest stakes — in Hartford Financial Services, MGM Resorts and Boston Scientific — went on a tear in the final quarter of the year, with gains of 16 percent, 30 percent and 26 percent, respectively.
“Several of his general investment themes this year came to fruition,” the investor in the Paulson Advantage Fund said.
Mr. Paulson stands out in what may go down as a lukewarm year for many hedge fund managers. The average return for funds through the end of November was 7.1 percent after fees, according to a composite index tracked by Hedge Fund Research of Chicago. Investors would have done better buying a low-cost mutual fund that tracks the Standard & Poor’s 500-stock index, which rose 7.8 percent during that period.
With volatile markets creating uncertainty for hedge fund managers this year, some investors are surprised that these funds did even that well. But they expect the funds to continue to attract money from investors, particularly state pension funds seeking higher returns to offset their budget shortfalls.
“When investors look back at the year they’re going to be pretty happy,” said David T. Shukis, a managing director of hedge fund research and consulting at Cambridge Associates, which oversees $26 billion in hedge fund assets for clients.
But the lackluster performance has other people wondering: are hedge funds worthwhile? The high fees and muted returns — and a long-running federal investigation into insider trading in the industry — has cast a cloud over a business that long defined Wall Street wealth.
“A client told me the other day that paying these ridiculous fees for single-digit returns, then worrying about these investigations — it’s just not worth it,” said Bradley H. Alford, chief investment officer at Alpha Capital Management, which invests in hedge funds. “A lot of these things you can sweep under the rug when there are double-digit returns, but in this environment it’s tougher.”
This year, bets by hedge fund managers were whipsawed by the stock market “flash crash” in May; the European debt crisis; frustration with the Obama administration over what many in the business viewed as anti-Wall Street rhetoric; and the Federal Reserve’s unusual strategy of buying bonds in the open market to hold down interest rates.
“It was an interesting year where you had to have a couple of gut checks,” said David Tepper, founder of Appaloosa Management, whose Palomino fund, which invests largely in distressed debt, was up nearly 21 percent at the end of October, according to data from HSBC Private Bank.
“If you had those gut checks, looked around and made the right decisions, you could make some money,” Mr. Tepper added.
There are still many hurdles for the industry to clear, including the insider trading investigation, lingering difficulty in raising money, and the liquidity demands from investors still fuming over lockups in 2008 that denied them access to their cash.
Some hedge fund notables will probably remember 2010 as a year they would like to write off. For instance, Harbinger Capital, run by Philip A. Falcone, was down 13.8 percent at the end of November, according to HSBC’s data.
But the Third Point Offshore fund, run by Dan Loeb, was up 25 percent for the year through November after it made successful bets on one of Europe’s largest media operators, ProSieben, and Anadarko Petroleum, according to a report obtained from an investor in the fund.
Other big names also fared well. SAC Capital Advisors, run by Steven A. Cohen, was up about 13 percent in its flagship fund, one of his investors said.
A handful of other usual suspects turned out solid performances this year too, according to investors in their funds: David Einhorn notched a 10.5 percent return at his Greenlight Capital hedge fund through November, raising the fund’s total to $6.8 billion.
And after two consecutive years of losses, James Simons, the seer of quantitative hedge funds, was up 17 percent in his two public Renaissance funds, which now collectively manage $7 billion.
The figures reflect performance after fees through November, and do not take into account the strong market rally in the final month of the year, some investors noted.
For many, being in the right sectors of the market — distressed debt and emerging markets, for instance — paid off handsomely.
“If you look at how some of the distressed managers performed, you’re seeing some really good returns among a number of funds,” said David Bailin, global head of managed investments at Citi Private Bank.
Bets on distressed debt produced a return of more than 19 percent as of the end of October for the Monarch Debt Recovery Fund, overseen by a pair of former Lazard managers. Similarly, Pershing Square, a fund run by William A. Ackman, was up 27 percent after fees through the end of November.
Mr. Ackman’s big win was a bet on the debt of General Growth Properties, a developer that emerged from bankruptcy last month.
It was a bumpy year for Mr. Paulson who, besides making a huge bet on gold — which rose 30 percent — also took large stakes in several companies he believed would benefit from a sharp recovery in the economy, including banking and financial services companies.
But as the economic recovery sputtered along, Mr. Paulson’s portfolio sank, prompting some critics to claim that his funds had become too big to manage. Some of Mr. Paulson’s investors asked for their money back around midyear.
At one point this summer, in fact, other hedge fund managers were selling short stocks Mr. Paulson held in his funds, betting that redemption requests would flood in and that he would be forced to sell down some of his big positions, according to a hedge fund trader at another firm who declined to be named for fear of damaging business relationships. He said investors were making similar bets against stocks held by Mr. Falcone’s Harbinger fund.
As recently as the end of September, Mr. Paulson’s flagship Advantage Plus fund was down 11 percent. As of last week, the fund was up more than 14 percent for the year. (His clients are mostly institutions that invest a minimum of $10 million in the fund.)
Patience paid off for Mr. Paulson as many bets he made late last year and early this year finally shot higher in the last quarter.
This year, Mr. Paulson bought 43 million shares of the gambling company MGM, whose shares have soared more than 30 percent since the end of September. A bet of 40 million shares in the cable giant Comcast has risen 22 percent this quarter.
Shares of Boston Scientific, of which Mr. Paulson owns 80 million shares, have skyrocketed 26 percent, and his 44 million shares of Hartford Financial Services climbed 16 percent in the quarter.
One of Mr. Paulson’s newer positions, a stake in Anadarko Petroleum, moved up 20 percent in the quarter.
With the last-minute rally, Mr. Paulson saved himself from being the headliner among flat funds this year. Most were not so fortunate, with many hedging against their stakes late in the year, expecting that stocks would end the year down. That move, some say, probably limited their gains.
“Psychology is such a fragile thing,” said William C. Crerend, the chief executive of EACM Advisors, which oversees a $3.6 billion fund for Bank of New York Mellon.