Before I go on, I feel that way about politicians. Some I like, and some, well, most I don't. I like Barry Goldwater and George McGovern, Bob Dole and Tony Blair, Robert Taft and Sam Rayburn, Benjamin Disraeli and Abraham Lincoln, John Randolph of Roanoke and Edmund Burke, Clarendon and Bolingbroke, Thomas More and Sir John Falstaff, and I'm more of an Akiva man than a Yishmael man, truth be told. To me, the two greatest men of the last half-century are MLK and Mandela, but I don't agree with a lot of their positions. So what. I love Samuel Johnson even though I find him often totally wrongheaded.
Now, to Paulson. All that to talk about an investor. I find odd juxtapositions edifying:
"Paulson Bucks Paulson as His Hedge Funds Score $1 Billion Gain
By Richard Teitelbaum
Dec. 2 (Bloomberg) -- There’s not a lot of light in Paulson & Co.’s 28th-floor headquarters on a drizzly November afternoon. The Alexander Calder sculpture and multicolored prints have been shipped to the firm’s new offices six blocks south. Darkness envelops the New York skyline.
The Dow Industrials have lost a total of 929 points over two days, and the jobless rate is poised to hit 6.5 percent. And John Paulson, who oversees $36 billion in hedge fund assets, isn’t exactly Mr. Sunshine either.
“You have deterioration in almost every asset class,” Paulson says. “You’re looking at declines in housing prices, the health of manufacturers and the earnings of various companies. There are rising delinquencies in auto loans and commercial real estate.”
Paulson, 52, peers over his tortoiseshell glasses. “There’s more to come,” he warns.
Paulson doesn’t smile as he says this, even though with each new calamity his bottom line grows. Paulson & Co. funds generated profits of more than $3 billion for the firm in 2007, mostly by betting the housing bubble, swollen with subprime mortgages, would burst.
As that year ended, he set his analysts poring over the balance sheets of overstretched financial institutions, including many in the U.K. “We focused on those banks with lots of mortgages,” Paulson says. “After those companies fell, we expanded our focus not just to mortgage assets, but to all credit classes.”
The payoff: Four of Paulson’s funds were among the 20 best- performing, and the 20 most profitable, hedge funds for the first nine months of 2008, according to data compiled by Bloomberg, other hedge fund research firms and investors.
$1.05 Billion Profit
The Paulson funds’ gains ranged from 15 percent to nearly 25 percent. Based on those returns, they were on track on Sept. 30 to furnish Paulson & Co. with $1.05 billion in profits.
Paulson’s performance was a striking success in a disastrous 2008 for hedge funds. The industry is reeling from convulsing markets, fleeing investors and the most serious credit squeeze since the 1930s.
Why do I think that this is important? Because this is how I believe we should understand oversight and regulation. We should be looking for the down side. Regulators should be Value Investors and Short Sellers. They should be people like Paulson."Paulson, sporting a French-cuffed shirt and patterned tie, looks every bit the investment banker he was when he worked for Bear Stearns Cos. in the 1980s. He says his firm’s 2008 performance benefited from market hedging -- balancing out short positions with long ones.
British regulatory filings show that Paulson funds made short-selling bets totaling more than $1 billion against Barclays Plc, HBOS Plc, Lloyds TSB Group Plc and Royal Bank of Scotland Group Plc. On average, the shares of those banks lost more than half their value in the nine months through September.
Unforgivable
The billionaire points out that his funds also went long in sectors likely to do well in a recession, including health care, utilities and tobacco. Paulson says he’s at a loss to explain why other funds were not hedged like he was. “Investors will forgive you if your returns are below average for a period,” he says. “They won’t forgive you if you lose money.”
Paulson’s returns have catapulted the soft-spoken native of Queens, New York, into the spotlight of the investing world. “This is rock star status,” says Sol Waksman, founder of Barclay Hedge Ltd., a Fairfield, Iowa-based firm that tracks and invests in hedge funds.
At a March 2008 fund of hedge funds awards dinner at New York’s Pierre hotel, Paulson & Co.’s performance was the buzz of the evening, with many of the winning managers having invested in its funds.
“Almost everyone who received an award thanked Paulson,” says one person who attended.
Paulson keeps a low profile, even by hedge fund standards. Raised in the waterside neighborhood of Beechhurst, he’s the third of four children of Alfred and Jacqueline Paulson. He credits the New York public schools, with their programs for gifted children, with giving him a leg up.
“I always had reading and math skills four or five years ahead of my grade,” he says.
Summa Cum Laude
After graduating from Bayside High School in Queens, he went to New York University, where he earned a bachelor’s degree in finance, summa cum laude, in 1978. As valedictorian, Paulson gave a graduation speech on corporate responsibility.
He went on to earn an MBA at Harvard Business School in 1980, finishing in the top 5 percent of his class. At the time, he says, banking jobs were scarce. He settled for a spot at Boston Consulting Group Inc.
Two years later, he landed an associate position at New York- based Odyssey Partners, an investment firm run by Leon Levy and Jack Nash. An Odyssey specialty was risk arbitrage, in which traders typically buy the stock of takeover targets and short that of the acquirer.
Paulson says Levy and Nash, both now deceased, taught him about risk arbitrage, real estate investing and how to profit from bankruptcies.
Levy a Mentor
“Leon was brilliant,” Paulson says. “A lot of what I know about deals today, I learned from them.”
Paulson left Odyssey to join Bear Stearns’s mergers and acquisitions department in 1984, rising in just four years to managing director.
After Bear sold shares in 1985, Paulson says, he decided he didn’t want to work for a publicly traded company and in 1988 joined privately held Gruss Partners, another risk arbitrage firm. Founder Joseph Gruss taught Paulson an important lesson.
“Joseph Gruss used to say, ‘Risk arbitrage is not about making money; it’s about not losing money,’” Paulson says."
That's great advice. Don't lose the taxpayers money."Paulson & Co, which he founded in 1994, also started as a risk arbitrage firm. Over the years, Paulson launched new funds to exploit market trends.
“We always operated with a lot of hedges,” he says. “We try to minimize market correlations. If you don’t, you’re going to be exposed when a market event happens.”
600 Percent Gain
He started the Paulson Credit Opportunities and Credit Opportunities II funds in 2006 after anticipating a shock in the housing and mortgage markets. In 2007, the funds racked up gains of more than 600 percent. They’re in the top 20 funds of the 2008 Bloomberg rankings for both performance and profits.
Paulson said in mid-November that more than 50 percent of the assets he managed were in cash and that the money he had invested was equally weighted between short and long positions.
“You have to get to the corner to see around the corner,” he says. “We haven’t gotten to the corner.”
He expects 2009 to reward those who invest in restructurings, strategic acquisitions and distressed credits. In November, Paulson began buying bonds backed by home mortgages, according to an investor. Spokesman Armel Leslie declined to comment. In making his investments, Paulson focuses on straightforward themes.
“You have to be simple to have a clear strategy,” Paulson says."
Bingo. That applies to TARP, regulations, you name it. I believe it, even though I couldn't make five cents running a Hedge Fund.
Now read this:
"Quant StrategiesDon’t tell that to Simons, who has earned billions for his firm through often-complex quantitatively driven trading strategies. Simons helped start Medallion in 1988 and continues to oversee the fund from Renaissance’s gated headquarters in East Setauket on New York’s Long Island.
Medallion assesses Renaissance employee-investors what may be the highest fees in the hedge fund business: a 5 percent management fee and 36 percent of profits.
Medallion has thrived in volatile times. In 1994, when the U.S. Federal Reserve raised its fed funds target rate six times to 5.5 percent from 3 percent, Medallion returned 71 percent. In 2000, when the Standard & Poor’s 500 Index fell 10.1 percent, Medallion returned 98.5 percent net of fees. In 2007, when markets began melting down, it gained more than 70 percent.
Today, Medallion is almost exclusively owned by Renaissance employees, who include mathematicians, astrophysicists, statisticians and computer programmers. They search for patterns and correlations that can divine a market’s direction. The fund spreads its bets around the world, trading everything from soybean futures to French government bonds.
Skating Along
Simons told Congress in November that Medallion, like Paulson & Co., was long and short equal amounts of equity. “By and large our business is not highly correlated with the stock market,” he said. “And so that is how we have skated along here.”
Medallion is just one of many funds that used mathematical models to profit in the first nine months of 2008. Of the 20 best performers in the Bloomberg ranking, at least six employed such strategies. One was Man AHL Diversified, No. 20 in the Bloomberg best-performance ranking, returning 7.7 percent. That gain means manager Tim Wong was on track to earn London-based Man Group Plc $72.5 million through the third quarter, according to Bloomberg data.
Man AHL typically uses computer-designed models to invest based on market trends. Fund managers that follow this path are known as commodity trading advisers, or CTAs, though their funds don’t necessarily invest solely in commodities."
Okay. They're smart chaps. But I'll stick with Paulson's modus.
"A Premium Price“The entire premise for the hedge fund industry is that you were paying a premium price for low correlations with the markets,” says Daniel Celeghin, a director at investment management consultant Casey, Quirk & Associates LLC in Darien, Connecticut.
Managers like Paulson zigged while others zagged. That means new money by the billions is likely to come their way. Paulson managed just $7 billion in late 2006, an amount that has grown fivefold.
“Even after the trillions of dollars that have been lost, there is still a tremendous amount of money lying about,” says Barclay Hedge’s Waksman. “There is more money than there are good places to put it. Good managers are scarce.”
That, in the end, may be the most important lesson to be learned from the 2008 market rout."
Fine. Death and Rebirth. Throw in Creative Destruction now. It all comes down to people. Human Agency. Even to read the models. That's why good managers are scarce. You'd better get some as regulators, or write the regulations so that even a dunce like me can follow them.
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