John Paulson goes from hot to not as most client money vanishes

Washington/New York: The walls keep closing in on John Paulson.

A decade after Paulson shot to fame betting on the collapse of the US housing market, the hedge-fund mogul is struggling to persuade investors to stick with him after a string of missteps on everything from gold to European bonds to drug stocks.

Since the end of 2015 alone, assets at Paulson & Co. have fallen by $6 billion from losses and client withdrawals.

The decline, underscored in the firm’s most recent regulatory filing, leaves Paulson and his employees with just $2 billion in client money. Most of the remaining $8 billion is Paulson’s own fortune.

His personal wealth aside, it’s a remarkable comedown for Paulson, one of the biggest names in the hedge-fund business. The idea that he might end up managing mostly his own fortune would have struck many as improbable 10 years ago. At his firm’s peak, in 2011, he oversaw $38 billion — half of which belonged to outside investors.

“As outside assets continue to erode, the running question for Paulson becomes more forceful: Why doesn’t he just convert to a family office?” said David Tawil, the founder of Maglan Capital LP, a New York-based hedge fund that specializes in event-driven strategies. “But to get the firm back on the rails, I don’t think is impossible.”

Paulson, 61, is making the choice to fight back. The billionaire has no plans to turn the firm into one that solely manages his own wealth, according to a person familiar with his thinking. He’s opened at least three new funds in the past two years, including a private equity fund with a seven-year lock up. But at the end of 2016, that fund contained almost all internal money, the filing shows.

A spokesman for the firm declined to comment on the drop in assets.

The decline in cash from outside investors can make it harder for the firm to operate and pay staff. That’s because Paulson and his employees don’t have to pay management or performance fees on at least some of their internal investments at the firm, according to the April filing.

The amount of capital invested by Paulson and his employees averaged about 80% of net assets by year-end, up from 59% at the close of 2015, based on calculations from the filings. At least five of its funds reported internal ownership of 90% or more. Overall, Paulson accounted for 90% of the insider money, according to the person who asked not to be named because the information is private.

Investors pulled money last year as returns slipped in funds that make event driven and merger arbitrage bets. Paulson, having founded the firm in 1994, described 2016 as “our most challenging year since inception,” in a fourth quarter report to investors.

The firm’s primary merger arbitrage strategy fell 25% last year as drug stocks including Valeant Pharmaceuticals International Inc., Allergan Plc and Teva Pharmaceutical Industries Ltd. plunged. Paulson Enhanced, a leveraged version of the merger arbitrage strategy, fell more than 49%.

New funds

The two newest hedge funds are up this year. One, a long-short fund that specializes in drug stocks, climbed 9.5% through May, while the Pure Spread Fund, that invests in announced mergers, rose 7%, according to the person.

As investors fled, Paulson kept putting money in, reinvesting almost all of his performance fees, according to the person. Paulson also donated $650 million in cash during 2013 and 2014 to his private philanthropic foundation, which in turn put most of the money in his hedge funds, tax documents show. That may have tilted the percentage of capital even further toward insiders compared with outside clients.

A successful rebound at his traditional merger arbitrage funds could sway institutional investors to return, said Stan Altshuller, the chief research officer at data-analytics firm Novus Partners Inc.

“Investors are very much attracted to big brands, and Paulson is one of the bigger brands,” said Altshuller. “He is one of the managers that can bounce back.” Bloomberg