John Paulson's Year-End Letter to Investors

The NYT's Dealbook has obtained a copy of John Paulson of hedge fund Paulson & Co.'s year-end letter, and it is a must-read. Paulson blew the doors off last year, heavily shorting financials, both directly and via credit default swaps, turning in 37.6% return net of fees. That is beyond outstanding in a year that destroyed many other other funds' reputations.

Looking forward to 2009, Paulson remains highly bearish. Here is his general strategy, he says, for the first half:

• Slight short exposure to equity markets
• Remain short financials
• Focus on long distressed opportunity
  • Mortgages
  • Bankrupt debt
  • Distressed
  • Capital restructurings
• Focus on strategic merger deals
• Maintain short focus on financials, with the belief that we are only perhaps half-way thru.

The letter is at the NYT, but I have echoed the NYT's Scribd copy below as well:

Comments

[Stone Fox C...:]

Whats impressive is that a good amount of all the Dr Dooms on tv these days didn't actually benefit from the downturn of 2008. Roubini supposedly has his money in long funds that lost a lot of money. Schiff was long European and emering market stocks and his funds lost just as much as anybody else. Rodgers was bullish on China and its markets were down more then the US. Paulson actually got it correct. Maybe more people should listen to him instead of the Dooms and Glooms on tv that we're still very wrong.

Feb 02 01:18 PM

[Dan O'Leary:]

Thanks for the post.

Feb 02 03:41 PM

[The Hern:]

I agree. Maybe Mr Paulson is onto something. One of the few funds I made money on this year was SKF.

Feb 02 04:17 PM

[Jason Rines...:]

Or you had what Sentinal calls on this SA site Cornucopians like Gabe Bornstein that said the mother of all treasury bubbles would emerge this quarter and that a massive Bull market would immediately follow. I argued for a year the transition back to Save and Invest would eliminate between 15-20% GDP. I finally had to tell him in an ungentlemen like way to shut up. My 16 hours days in 2007 when there was an economy paid off though my colleagues at the lake thought I was insane. Now I get to buy there boats for pennies on the dollar.

Feb 03 01:25 AM

[Moon Kil Woong:]

Great, it's nice to see someone is willing to buy up the banking sector's bad debt. They have plenty of it and don't even need to sell it at a decent price since the Fed is basically paying them off to dump it at $0 which further devalues this junk (another funny occurrence of unintended consequences).

I vote to give them Citibank next. All of it.

Feb 03 01:39 AM

[Crank Monkey:]

Subprime debt may not be nearly as bad as it's made out to be.

Assuming that all subprime borrowers default and that the housing which backs the debt is only worth 30 cents on the dollar would mean that these assets are undervalued.

Moronic accounting rules force banks to price these assets at $0 on their books and then to stop lending because they have no capital.

Trashing mark to market rules and making CDS transactions illegal unless you actually owned the insured asset would fix the problems.

This is how the Dutch were able to keep their financial system working when the tulip bubble burst.

Feb 04 02:24 PM