John Paulson suffers tall poppy syndrome
By Christopher Swann and Richard Beales
Any hint of negative numbers, and hedge fund watchers wonder if John Paulson has lost his touch. The industry’s new figurehead deserves the benefit of the doubt, for now. But his firm’s $30 billion scale and directionless markets make it hard for him to shine.
Over-achievers often suffer tall poppy syndrome, in which they are cut down to size by envious peers and public. So it’s no surprise that the 11 percent fall in Paulson & Co’s Advantage Plus Fund, the firm’s biggest, so far this year — against a small positive return for the average hedge fund — is drawing suggestions that he may have run out of big ideas.
That’s at best hugely premature. Even this year, Paulson & Co’s other funds are up. Clients who elected to have their fund shares denominated in gold, Paulson’s favored method with his own money, are still ahead even in the Advantage Plus Fund. For Paulson’s last full year loss, investors need to look back 12 years. And they still remember returns of up to almost 600 percent in 2007 as short bets on U.S. mortgages paid off, not to mention decent returns across the board in 2008 when most rival fund managers lost money.
The mortgage trade was a once in a lifetime thing. But even if investors recognize returns like that won’t be repeated, Paulson’s task is getting harder. Fame has swelled his fund in recent years, and profitable big bets are harder to find, and much harder to get out of, than small ones. Branching out into new strategies has reduced this problem for Paulson, but arguably has also led him away from his most familiar turf.
He has made his mark with ideas that are relatively well-defined — initially deal-by-deal merger arbitrage, and later exploiting a series of structural flaws in the U.S. home lending market. More recent trades like buying bank stocks, however, have depended more heavily on a broad theme — a robust economic rebound in the United States. With a 2012 investing horizon, it is early days for this strategy, but current market uncertainties make investing conviction hard to come by.
Of course, had Paulson worried about short-term volatility he wouldn’t have hit the jackpot in 2007. But his choppy experience so far in 2010 is a reminder for any investors expecting perfection that even the best can sometimes struggle.