Why Paulson’s talking
The ostensible job of a hedge fund manager is to deliver alpha, in the words of today’s conference, just like the ostensible job of a legislator is to govern. But just as the real job of a legislator it to get re-elected, the real job of a hedge fund manager is to raise money — to maximize the amount of funds under management.
John Paulson has been a hedge fund manager for 20 years now, and for most of that time he was fair-to-middling when it came to raising money. He had solid returns, he was respected in the industry, and he plugged away, mostly in the stock market, making a good living for himself and keeping his investors reasonably happy. Outside the industry, almost no one had heard of him.
All that changed, of course, in the financial crisis, when this long/short stock market investor suddenly switched his attention to bonds, and made one of the largest bets ever seen, on the implosion of the mortgage market. The bet paid off, and Paulson became a household name, a hero about whom an entire book was written, under the title “The Greatest Trade Ever”.
Making $15 billion for your investors is the best marketing any hedge fund manager could dream of, and soon Paulson found himself with money pouring in. Nearly all of the investors who were invested with him in 2007 kept their profits fully invested; many more lined up to join them. And by 2011, the $7 billion that Paulson was managing in 2007 had grown more than fivefold to $36 billion. Paulson & Co was suddenly catapulted to a whole new level of fame and size. The number of employees grew, the number of offices around the world grew, and Paulson suddenly found himself managing an organization much bigger, and much more complex, than anything he had been used to previously.
Size, it turned out, didn’t much suit Paulson. The money which was quick to flow in after Paulson made monster returns turned out to be just as quick to flow out when his returns were disappointing, and now Paulson & Co has just half the assets it had in 2011, with about $18 billion under management.
That’s the context in which Paulson gave his first-ever television interview today, fielding softball questions from CNBC’s Carl Quintanilla. Paulson is not a brash self-publicist in the mould of Bill Ackman or David Einhorn, and he’s not the kind of investor who likes to orchestrate the release of his own positions as a way of moving the market in his favor. But hedge fund managers don’t only appear on CNBC because they like the opportunity to talk their book. There’s another big reason they make such appearances: it’s free marketing for their funds.
It’s no coincidence that Paulson’s debut CNBC appearance took place after the single largest drop in AUM he’s ever seen. All market participants know what momentum looks like, and right now investors aren’t looking at Paulson’s performance so much as they’re looking at the steady outflow of funds from Paulson’s once-hot company. Paulson knew that he had to change the narrative, so he agreed to appear at a high-profile investor conference, to talk about his recent run of positive results, to talk his book a little bit, and — of course — to distract attention as much as possible from the goings-on downtown, where his former colleague Paolo Pellegrini was testifying about the role that Paulson played in a high-profile fraud case.
All of this looks a tiny bit desperate. The Delivering Alpha conference is hardly slumming it, of course: it was full of boldface names, including Treasury secretary Jack Lew, and there’s no reason why Paulson should not turn up at such an event. But he did look uncomfortable under the hot TV lights, and his main message — that everybody should be making big leveraged bets on a housing-market recovery — was not particularly compelling.
There’s an art to media and conference appearances as marketing schtick: you need to come across as being smarter than everybody else, with a fresh and profitable angle. By that standard, Paulson failed today. He said nothing which would convince the assembled investors that they’d be better off investing with him than with anybody else. And in truth there’s not much he could say.
For although Paulson likes to talk about the long track record of his fund, and how he’s been managing money since 1994, in reality Paulson & Co is pretty unrecognizable now, compared to its pre-crisis incarnation. The Greatest Trade Ever changed Paulson from a reliable base-hitter to someone swinging for the fences. And from a bottom-up stock-focused investor to someone looking to monetize big macro theses about things like inflation.
The result has been a lot of volatility, a lot of misplaced conviction, and a lot of people wondering whether there’s any reason at all to believe that lightning can strike twice. Paulson’s still making big bets; some will succeed, and some will fail. But the fact is that hedge fund investors are increasingly institutional, looking for steady outperformance and careful risk management, rather than looking for ten-baggers. Post-crisis Paulson doesn’t fit that bill: he’s too much of a risk-taker. Which is why he’s now doing his Willy Loman act, taking his story to the delegates at a CNBC conference, and the viewers at home. If the big institutions aren’t buying his pitch, maybe the smaller fry will be more interested.