John Paulson’s returns falter again; investors fret

BOSTON, Thu Jun 28, 2012 – Billionaire trader John Paulson has told his wealthy investors that he has learned from his mistakes of 2011, which produced enormous losses for his closely watched hedge fund.

The founder and manager of Paulson & Co, who made his fortune and fame by betting against the subprime mortgage market, went so far as to tell investors in January that last year’s big losses, including a 50 percent decline in his popular Advantage Plus fund, were an “aberration.”

But as the months tick on, many investors are still waiting to see the dramatic turnaround Paulson has vowed to deliver.

Halfway through 2012, Advantage Plus is down again, losing 10 percent through May. Another big portfolio that bets on gold – once a bright spot for Paulson – was also in the red. In both cases, he blamed losses in gold stocks for the declines.

This has taken a huge bite out of the firm’s assets, which have fallen to $22 billion from $38 billion early last year, according to investors. Redemptions were substantial, but poor performance accounted for the bulk of the drop, they said.

While Paulson still has loyal clients, some U.S. public pension funds and Wall Street firms that are invested with him have expressed their growing unease.

There are few signs of a quick comeback for the 56-year-old trader, who fumbled in 2012 by missing out on a big first-quarter rally in U.S. financial stocks. Last year, a Paulson fund got pounded by being too bullish on banks. He cut some of those losing positions – most notably by exiting Bank of America Corp in late 2011, just before the rebound.

Adding more pressure are some rare defections as two of his top lieutenants – Robert Lacoursiere, a former partner, and banking analyst James Fotheringham – left in March to start their own fund, Petrarca Capital.

“It is fair to say that he is having a difficult year,” said Steve Yoakum, executive director of the $30 billion Missouri Public Employee Retirement System, which is invested with him.

New Mexico, which stuck by Paulson through last year’s growing losses, pulled its $40 million investment in the first quarter.

OneWest gains a ray of hope for Paulson in downbeat times

BOSTON/NEW YORK ― John Paulson’s roll of the dice on a lender that rose from the wreckage of the financial crisis is emerging as one of the few big winners for the hedge fund manager in what is shaping up as a downbeat year.

A 2009 investment in a company that acquired assets from failed lender IndyMac is up some 200 percent, the billionaire hedge fund manager told investors when he met with some of them in Paris earlier this month.

The paper gain in the value of OneWest, the newly minted Pasadena, Calif.-based bank, is responsible for much of the 24 percent gain in Paulson’s $3 billion Recovery Fund last year and it has helped to push it up a further 4.22 percent in the first five months of 2011.

The sharp gain in OneWest stands in stark contrast to the high profile losses some of Paulson’s portfolios are suffering right now thanks to declines in some of his biggest holdings including Bank of America and Citigroup and, in particular, the Toronto-listed Chinese company Sino-Forest.

In the first three weeks of June, Paulson’s Advantage fund lost nearly 9 percent, leaving it down nearly 15 percent for the year, according to investors in the fund.

Much of the devastation in Paulson’s largest fund is due to a now disastrous bet on Sino-Forest, a forestry company which lost much of its value in the wake of a critical report from short-seller Carson Block and his Muddy Waters LLC research firm.

Unfortunately most Paulson investors are not reaping any of the benefits from the rise in OneWest’s fortunes. That’s because Paulson’s investment in the privately-held bank is sequestered solely in the Recovery Fund, which is one of the smallest in Paulson’s $37 billion empire.

Academic research has shown that smaller funds tend to outperform larger ones and this appears to be holding true, for now, at Paulson & Co.