John Paulson, the billionaire hedge fund manager of Paulson & Co., is well known for betting against sub-prime mortgages before they collapsed, and buying banks after their collapse. In 2010, Paulson earned a record amount of money for managing a hedge fund on the back of large bets on gold and banks, and an increased client-base, but he has since been plagued by questionable decisions and market underperformance.
In 2011, Paulson & Co.'s funds had some notable issues, including poor performance fueled by large investments in the financial sector and the negative news that the hedge fund was a major investor in Sino Forest, a Chinese timber and wood company that was accused of fraud. Paulson subsequently spent the second half of 2011 selling various financials, Sino Forest and even some of his gold, Paulson & Co's largest single holding.
So far in 2012, it appears Paulson's underperformance may be continuing. According to Paulson's last 13F, filed on February 14, 2011, the fund liquidated some key investments in financials, which have been among the markets best-performing equities during the first quarter of 2012. Paulson & Co liquidated its holdings in both Bank of America (BAC) and Citigroup (C) during the fourth quarter of 2011. Paulson owned about 25 million shares of Citigroup, worth about $640 million, and 64.3 million shares of Bank of America worth about $394 million.
These sales were poorly timed, possibly at or near these bank's recent lows. For example, since the beginning of the year, Bank of America is up 76.26 percent and Citigroup is up 39.45 percent, compared with the S&P 500 appreciating around 15.3 percent.
Bank of America and Citigroup were two of the investments that Paulson started accumulating in 2009. These investments were then among his largest equity investments. Paulson manages about $24 billion, but a large percentage is allocated outside of equity investments. Paulson's financials helped make his 2009 and 2010, but ruined his 2011.
Now it appears that the absence of these financials may contribute to potential underperformnce in 2012. It will be difficult for funds that shed these financials to perform at the same rate as those that held onto them. Paulson also sold nearly 1 million shares of BlackRock (BLK), valued at just under $150 million and reduced his position in Hartford Financial Services Group (HIG), though he still owns about 8 percent of the company.
Another notable liquidation by Paulson & Co. last quarter was Hewlett-Packard (HPQ). Paulson & Co formerly held about $340 million worth of the tech large cap. The sale of HPQ may have been a sensible one for the hedge fund, as the technology giant is down 4.95 percent so far in 2012.
Though Paulson & Co. reduced its position in the SPDR Gold Trust ETF (GLD) by 3 million shares last quarter, the fund still held 17.3 million shares at the end of 2011, worth about $2.85 billion. GLD has been Paulson's largest single equity holding since 2010, and gold continues to be a theme in Paulson's overall portfolio. So far in 2012, gold has appreciated 6.12 percent, which is less than half the gain by the broader equity market. Paulson also accumulated shares in some gold miners, most of which are negative so far in 2012.
Many of Paulson's sales appeared related to investors exiting certain funds, requiring the hedge fund to raise redemption funds. Some investors may have exited funds that underperformed in 2011, such as his financial and commodity funds, while others may have realized some gains on prior gold fund investments that they believed required reallocation.
If financials continue to outperform the market and gold continues to underperform equities, it appears probable that Paulson will once again underperform the markets in 2012.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice, as it does not take into account your specific situation or objectives.
