Former Hedge Fund star John Paulson, bets the ranch(es!) – again on gold going up

John Paulson, founder and President of Paulson & Co, a New York-based hedge fund has had a pretty torrid time of late.  Paulson made nearly $4 billion personally (!) in 2007/08 by short-selling subprime mortgages and cleaned up again to the tune of $5 billion in 2010 – a record for the hedge fund industry.

His bet against the subprime mortgage bubble has been called “The Greatest Trade Ever”, and has been chronicled in a book of the same name by Greg Zuckerman – a  must read.

His credit fund increased 591%, and the Advantage Plus fund rose 163% in 2007. But things started to go off the rails in 2011, resulting in significant redemptions by clients and reducing the firms assets from $38 billion at its peak to $22 billion.

Paulson’s Advantage Plus fund finished 2011 down 52.5%, whilst the unleveraged Advantage fund fell 36%, the  Recovery fund fell 28% and credit fund finished the year down 18% – a quartet of shocking figures for such a venerable figure in the industry. The best performing funds were the Paulson Partners fund, down 10%, and the Gold fund, down 10.5% – the reason for the form being primarily that the funds holdings were hedged into the Gold price.

Bad bets on gold mining companies, financial stocks like Bank of America and Citgroup as well as Sino-Forest (the Chinese timber company that turned out to be a fraud) and Hewlett-Packard did Paulson and Co no favours. Paulson exited Bank of America in late 2011 before it rebounded in 2012 and he admitted to his investors that he was overly optimistic about the U.S. recovery and underestimated the scale of the eurozone crisis.

In 2012, many of Paulson’s funds are down yet again. The gold fund is down 23% as the Gold price finally succumbs to gravity and the Advantage Plus is down 18%, piling on the pressure on architect of “the greatest trader ever”! Although some people believe the real brains behind the trade of the century was Paolo Pellegrini whi also struggled to replicate his form in 2011 and actually closed up shop.

Robert Lacoursiere, a former partner and banking analyst, James Fotheringham both left in March to start their own fund, Petrarca Capital.

Bloomberg has reported that Paulson raised his stake in the SPDR Gold Trust ETF (exchange traded fund) which tracks the price of gold during the second quarter of 2012, leaving his funds with more than 44 percent of its U.S. traded equities tied to bullion. This compared with 33% at the end of quarter one and 25% at the end of 2011.

Paulson & Co. bought an additional 4.53 million shares of the the gold ETF, the firm’s largest position, and bought 4 million shares of NovaGold Resources Inc  and reduced positions in AngloGold Ashanti and Gold Fields as well selling energy, financial and auto-parts stocks. The relative weighting of gold related securities in his U.S. portfolio is the highest in three years.

Gold prices have been lacklustre of late. At today’s $1601 an ounce it is only marginally higher than the $1578 set at the close of 2011 and the $1512 at the end of the second quarter of 2012. In August 2011, the metal was over $1900 an ounce.

Paulson is betting that the U.S. and Eurozone economies will stagnate even more leading to further intervention by central banks to stimulate growth. Strong recent US jobs data indicate that the Federal Reserve is unlikely to move immediately to boost its programme of Treasury bill buying called Quantitative Easing (QE). Even though stock market investors have been anxious to see further Central Bank intervention, the FOMC (Federal Open market Committee) of the Federal Reserve seems to be resisting. The Fed bought nearly $2 trillion of mortgage-backed securities and U.S. government debt and more than tripled the size of its balance sheet to $2.85 trillion since the financial crisis started in 2007.

The expectation is that more QE could finally lead to an increase in inflationary pressures although there are scant signs to date that this is the case despite the heavy intervention by the European Central Bank, Bank of England and Federal Reserve. Higher inflationary expectations have historically led to a rise in the gold price as a hedge against inflation, a falling dollar also boosts gold. Paulson’s over sized bet on the price of bullion indicates he is convinced that inflation will rear its ugly head again. It may well do so, but whether it will be in 2012 is the $64,000 question and with the Paulson Advantage fund down 70% in the last year and a half, Paulson & Co. have precious little time to regain investor confidence.

Once a star hedge fund manager, the sparkle of success has left Paulson for now! Staying at the top in the world of hedge funds is tough indeed.

Contrarian Investor UK