Paulson’s $32 Billion Funds Prompt Too-Big Concerns (Update1)
By Katherine Burton

March 29 (Bloomberg) -- John Paulsonstarted the year overseeing $32 billion in hedge funds, third in the world behind JPMorgan Chase & Co. and Bridgewater Associates LP. Unlike many of his biggest rivals, he’s taking in new cash, raising the question of how much money is too much for a hedge-fund manager.
“There’s no doubt that Paulson is a big draw for investors at the moment,” saidRichard Tomlinson, founder of London-based Tomlinson Investment Consulting, which advises clients on hedge funds. “As with all managers that bulk up, there’s always the risk of returns becoming mediocre.”
Paulson & Co., the New York-based firm that the former Bear Stearns banker and Gruss Partners trader started in 1994, differs from many large competitors because it makes concentrated bets, such as the wager against subprime mortgages that helped generate $3 billion of profit in 2007. As assets increase, it can get harder for a fund to find investments big enough to drive returns and to trade without distorting prices.
Paulson’s main $19 billion Advantage funds, which primarily seek to profit on distressed debt, bankruptcies and mergers, have lagged behind peers this year and last after beating them in 2007 and 2008. Armel Leslie, a spokesman for Paulson, declined to comment.
Lessons of Tiger
The world’s largest hedge funds are approaching their previous peak assets after recovering from their worst-ever losses and investor outflows in 2008. They are benefiting from a shift by pension funds and endowments to established firms with steady returns and staff dedicated to risk management.
Fourteen firms managed $20 billion or more in hedge funds at the start of 2010, when industry assets stood at $1.6 trillion. Hedge funds oversaw a record $1.9 trillion in mid- 2008.
In 1998, only George Soros’s Soros Fund Management LLC and Julian Robertson’s Tiger Management LLC exceeded the $20 billion mark. Within two years of hitting that milestone, both firms had suffered big losses and decided to stop managing money for other investors.
“There is a point where you can be too big to generate returns,” saidLawrence P. Chiarello, a partner at Red Bank, New Jersey-based SkyView Investment Advisors LLC, which selects hedge funds for clients. “Being large and able to build a strong infrastructure are good things, but in general I think the pendulum has swung too far.”
The size at which a fund may become too big depends on factors such as its investment strategy and the markets in which it trades, Chiarello said.
Citadel’s Stumble
The industry is replete with examples of managers losing billions after they took increasingly bigger bets to produce top returns. Robertson’s fund was brought down in part by a 25 percent stake in US Airways Group Inc. and $2 billion of losses when the U.S. dollar fell against the Japanese yen.
In 2008, Chicago-based Citadel Investment Group LLC, whose assets had climbed to about $20 billion, lost 55 percent in its biggest funds after wagers on convertible, high-yield and investment-grade bonds hedged with credit-default swaps all went awry. It managed about $12 billion at Dec. 31.
Hany Shawky, a finance professor at the University of Albany-State University of New York, wrote a paper in 2008 that found that smaller funds outperform larger funds on an absolute basis. On a risk-adjusted basis, which takes into account the swings in returns, large funds were better. Shawky is working on an update to his study, which he said has found similar results.
Smaller Bets
While New York-based JPMorgan and Bridgewater of Westport, Connecticut, are larger than Paulson’s firm, they tend to make comparatively smaller bets.
JPMorgan manages about $33 billion in more than 50 funds in markets around the globe. The bank’s wholly owned Highbridge Capital Management LLC subsidiary manages an additional $11 billion in four funds.
Bridgewater manages its $43.6 billion in one strategy it calls Pure Alpha. The firm takes many small positions using futures to bet on stock indexes, bonds, currencies and commodities. Those markets are liquid, meaning that traders can get in and out of positions without moving prices dramatically.
Paulson tends to invest a lot in trends he has identified.
In 2007, before the housing market collapsed, he spent $2 billion buying credit-default swaps on subprime mortgages, a trade that soared when home loans went bad in record numbers. Today he has 10 percent to 15 percent of his Advantage funds in the shares of gold-mining companies on the expectation that prices of the metal will rise along with inflation.
Housing Score
The subprime wager paid off. The Advantage Plus fund, which uses leverage to amplify returns, jumped 160 percent in 2007 and 37 percent in 2008. Comparable funds gained an average of 6.6 percent in 2007 and fell 22 percent in 2008, according to Chicago-based Hedge Fund Research Inc. The firm’s Credit Opportunities funds, which held the biggest chunk of Paulson’s subprime trade, were up 600 percent in 2007.
Paulson’s performance was more pedestrian in 2009. The Advantage Plus fund climbed 21 percent, compared with about 25 percent for peers. Through February 2010, it lost 1 percent, compared with a gain of 1 percent for similar funds.
Even as performance trailed peers last year, the Advantage funds increased the amount of borrowed money they used. In June, the funds had borrowed 34 cents for every dollar of net assets, according to a presentation Paulson made at a Merrill Lynch & Co. investor conference in February. The level climbed to 50 cents for every dollar by December.
Some Paulson investors say they aren’t concerned that he’s gotten too big.
Bigger Not Bad
“For funds that invest in a number of strategies, size isn’t an issue,” said Brad Alford, head of Atlanta-based Alpha Capital Management LLC, which picks hedge funds for clients and is a Paulson investor. “Bigger funds produce more in revenue, so they can hire the best talent and build the most robust infrastructure.”
Paulson, 54, started his hedge-fund career 16 years ago with a fund that focused on merger arbitrage. In 2004, when he was managing $3 billion, he began expanding, adding the first Advantage fund. He opened his first credit fund in 2006. At the end of 2008, he started the Recovery Fund, now $1.7 billion, to bet on companies like Citigroup Inc., Conseco Inc. and Bank of America Corp. as they rebounded from the financial-services meltdown.
This year he launched a $350 million gold fund and a real estate fund that is buying property at distressed prices.
At the Merrill Lynch investor conference, Paulson defended the size of his firm as he closes in on the $36 billion in assets he reached in 2008.
Marketing Continues
“Paulson funds tiny relative to market opportunities,” was the title of one slide. It compared the $6.9 billion Credit funds to the markets for distressed mortgages, high-yield bonds and leveraged loans, saying each are more than $1 trillion.
Paulson continues to market his funds because he sees opportunities in the next 18 months to 24 months as companies restructure their debt, said Charles Krusen, head of New York- based Krusen Capital Management LLC and a Paulson investor.
The unleveraged version of the Advantage fund is targeting returns of 12 percent to 15 percent, he said.
“We think they’ll be able to do that,” said Krusen, adding that Paulson has closed his credit and merger-arbitrage funds before when he was concerned their size might hinder performance.
Brevan Howard Asset Management LLP, Europe’s largest hedge- fund firm, closed its $2 billion Asia Fund and $2.5 billion Emerging Market Strategies Fund to new investors last November, and is limiting inflows into its $21.3 billion Brevan Howard Master Fund Ltd.
Tudor, Shumway
Paul Jones’s Tudor Investment Corp. has stopped taking money into its $9.5 billion BVI Global Fund Ltd. Jones also returned some of 2009 profits in the Greenwich, Connecticut- based fund to clients this year as another way to cap assets.
Chris Shumway, who runs Greenwich, Connecticut-based Shumway Capital Partners LLC, a stock hedge fund, isn’t accepting more money after reaching $8 billion. New York-based King Street Capital Management LP, a credit fund, told investors it would “moderate” growth now that it has more than $20 billion, according to a letter sent to investors.
“Three of our core managers have closed to new investments,” said Stewart Massey, who runs Massey Quick & Co., a consulting firm in Morristown, New Jersey, that caters to wealthy individuals, endowments and foundations. “We love to see that. What they are saying is, ‘I’m running this for performance, not scale.’ ”

March 24, 2010

Moore Capital, Deutsche Bank, Exane Workers Probed by U.K. in Insider Case
Australian Wealth Fund Ends Talks With Canadian Pensions on Transurban Bid Australia’s sovereign wealth fund terminated talks with two Canadian pension funds on joining a A$6.8 billion ($6.25 billion) bid for Transurban Group, sending shares of the toll-road owner tumbling in Sydney trading.
Soros Fund Management Buys $38 Million in Lehman Claims From Goldman Sachs Soros Fund Management LLC bought $38 million in claims on bankrupt Lehman Brothers Holdings Inc. from Goldman Sachs Group Inc., according to court filings today.
Elliott, Paulson Are Said to Weigh Investment in General Growth Properties Elliott Associates LP and Paulson & Co. are discussing a plan to team with Brookfield Asset Management Inc. to bring mall owner General Growth Properties Inc. out of bankruptcy, two people familiar with the talks said.
Tennenbaum Capital Said to Seek $1 Billion for Fund to Buy Distressed Debt Tennenbaum Capital Partners LLC, an investment firm founded by Michael Tennenbaum, is seeking about $1 billion to buy distressed debt after starting a bankruptcy- loan fund, said two people with knowledge of the plans.
Dai-ichi Raises $11 Billion in World's Biggest IPO Since Visa Sale in 2008 Dai-ichi Mutual Life Insurance Co. will raise 1.01 trillion yen ($11 billion) in the world’s biggest initial public offering in two years after pricing the IPO at the middle of its forecast range.
Moore Capital, Deutsche Bank, Exane Workers Probed by U.K. in Insider Case Two senior professionals at “leading” London financial firms and a hedge-fund employee were arrested as part of Britain’s financial regulator’s largest operation to crack down on insider trading.
Rich Clients Pumped for Fees in Private Banking's `Conflict of Interest' After Steffen Binder and his partners sold a Frankfurt-based Internet research firm for $15 million in September 2000, he invested his share of the windfall with private banks. As the dot-com bubble burst, his holdings shrank faster and then rose more slowly than the market.
Madoff Victims Appeal Ruling on Picard's Method for Paying Fraud Claims Former customers of Bernard Madoff, who conducted the biggest Ponzi scheme in U.S. history, have appealed a judge’s decision that lets the liquidator of Madoff’s business reject years’ worth of fake profit from the fraud when calculating victims’ claims for repayment.
Covered Bonds Rise Most Since '06 Signaling Europe Rebound: Credit Markets Europe’s banks are selling covered bonds at the fastest pace in four years in a sign that debt investors are betting Europe’s economy is strong enough to weather the budget crisis in Greece.
at 1:50 AM 0 comments   
Labels: Distressed, Insider Trading, Soros

March 03, 2010

Soros, Paulson Hedge Fund to be Investigated for Bets Made on Demise of the Euro
WallStreetPit.com, March 3, 2010

The U.S. Justice Department has launched an investigation into whether heavyweight hedge funds including Soros Fund Management, SAC, Greenlight Capital and Paulson & Co. aggressively shorted the euro in recent weeks to destabilise it, the WSJ reported on Wednesday, citing people familiar with the matter.

According to the paper, the department has asked hedge funds to retain trading records and electronic communications relating to the EU currency which needless to say has come under strong selling pressure as a result of the Greek debt crisis. The euro has lost more than 10% since November. It currently trades at $1.3609.

The Journal article disclosed that the big euro bets — some observers estimate that traders and hedge funds have bet nearly $8 billion against the euro — were emerging amid gatherings including an “idea dinner” involving a number of hedge funds, where a trader argued that the euro is likely to fall to “parity,” or equal to, against the dollar on an exchange basis (very low interest rates have made the funding of massive block trades more feasible.)

At one such gathering, a dinner on Feb. 8 at a Manhattan restaurant, an SAC portfolio manager, notes the Journal, said he believed the euro will continue bleeding and urged other traders to short it as his firm had, according to people at the dinner. The size of the bets against the euro is unclear.

One of the questions investigators will most likely examine at this point is whether such information-sharing amounts to ‘collusion’, which implies that a secret agreement between the parties involved was made in order to undermine the currency. However, the Journal points out that charges relating to collusion on Wall Street have been a rarity because of the difficulty of proving that firms intentionally sought to act together and acted nefariously.

The reported Justice Department probe comes at a time when financial institutions are facing scrutiny over their role in the Greek financial crisis.

Critics accuse Wall Street firms of exacerbating the crisis by helping European governments mask their debts through derivatives deals from the budget overseers in Brussels to only benefit later from them by driving down the value of securities related to them. Moves that are reminiscent of the trading action at the height of the financial crisis like bets against Lehman Brothers and other troubled firms.
at 10:32 PM 0 comments   
Labels: Currency, Hedge Funds, John Paulson, SAC, Soros

March 02, 2010

Soros Signals Gold Bubble as Momentary Buyer While Goldman Predicts Record
Soros Signals Gold Bubble as Momentary Buyer While Goldman Predicts Record George Soros is helping drive up gold prices by doubling his bet in a market even he considers a “bubble” as Goldman Sachs Group Inc., Barclays Capital and HSBC Holdings Plc predict more gains before it bursts.
American Funds Ranked First by Morningstar for Wealth Creation, Janus Last American Funds, the biggest active manager of stock and bond mutual funds, created the most wealth for investors in the past decade, while Janus Capital Group Inc. destroyed the most, Morningstar Inc. said today.
VIX Tracking Junk Bonds Proves to PNC Gains for S&P 500 as Pimco Says Not! Just when U.S. consumer confidence is dropping and Federal Reserve Chairman Ben S. Bernanke says the economy is too fragile to raise interest rates, the options market shows investing in stocks is getting safer.
Pimco's Gross Says Sovereign Debt Returns Will Resemble Corporate Yields Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., said government bailouts suggest a global “unicredit” type of bond market where rates on sovereign debt will resemble the yields of corporations and industries they guarantee.
Buffett Cancels Geico Credit-Card `Fiasco' With Loss of 45 Cents on Dollar Billionaire Warren Buffett shut a Berkshire Hathaway Inc. credit-card business and sold bad loans at 55 cents on the dollar in what he called a “very expensive business fiasco.”
Greece Loses Kokusai's Investment as Bondholders Demand 7% From Next Sale Petros Christodoulou, the new head of Greece’s government debt agency, faces a dwindling investor base as the country prepares to sell bonds as soon as this week.
Prudential CEO Thiam Makes Biggest Bet of Career With Record Asia Purchase Prudential Plc Chief Executive Officer Tidjane Thiam knows about taking risks.
Greece Now, U.K. Next as Scots Investors Ready for 20-30% Plunge in Pound While the eyes of the world focus on Greece’s debt crisis, investors in Edinburgh are busy preparing for the U.K. to be next.
Norway Gives Approval for Its Wealth Fund to Buy Up to 5% in Real Estate Norway gave approval for its $440 billion sovereign wealth fund to invest as much as 5 percent of its value in real estate to increase returns and limit overall risk after record losses in 2008.
at 3:27 AM 0 comments   
Labels: Soros, Sovereign debt, Warren Buffett
Soros Disappointed In Obama's Job Performance
Billionaire investor George Soros, who helped U.S. President Barack Obama raise money for his presidential campaign in 2008, on Sunday said he wasn't happy with Mr. Obama's handling of the financial crisis.

Mr. Soros said the government should have taken over U.S. banks instead of bailing them out, a move he suggested would have been more popular with Americans.

'The solution that he found to the financial crisis, which was to effectively bail out the banks and allow them to earn their way out of the hole, was, in my opinion, not the right solution,' Mr. Soros said in an interview with CNN. 'He should have compulsorily replaced the capital that was lost.'

(This story and related background material will be available on The Wall Street Journal Web site, WSJ.com.)

After taking office at the start of 2009, Mr. Obama stuck to plans implemented by his predecessor George W. Bush to rescue banks by buying toxic assets from them and injecting capital into struggling lenders. As the financial sector recovered, the Obama administration put banks through stress tests to determine how much new capital they would need to withstand a severe recession, but steered clear of nationalizing them.

Mr. Soros said China took a better approach to dealing with the financial crisis by forcing its banks to increase their minimum capital requirements. He suggested that Beijing has in recent years been more successful in its handling of economic policy than the U.S.

He said the 'market fundamentalist' belief prevailing in the U.S. that markets correct their own excesses was wrong, and criticized former Federal Reserve Chairman Alan Greenspan for taking that line. Mr. Soros--who as chairman of Soros Fund Management, said he manages about $27 billion in assets--cited his own investment decisions as an example.

'When I see a bubble, I buy that bubble, because that's how I make money,' he said.

Mr. Soros doubled his bet on gold at the end of 2009 as prices for the metal rose, a filing showed in February, a few weeks after Mr. Soros called gold the new asset bubble.

Mr. Soros said the U.S. and China needed to work closely to manage the global economy, calling recent signs of bilateral tension worrying. The two countries disagreed over how to tackle global warming during a meeting in Copenhagen recently, and have faced off over trade and currency issues. Mr. Obama met with Tibet's exiled spiritual leader the Dalai Lama of Tibet in the White House this month, despite official protests from China.

'Unless we stop it in the next few months, I think that we could yet fall back into a situation that prevailed in the 1930s, where each country is for itself,' Mr. Soros said. He said trade protectionism was his top concern, in terms of the global economy's outlook.

Turning to Europe, Mr. Soros said worries about Greece's debt had exposed a flaw in the euro's construction, namely that the 15 euro zone countries, which share a single currency, had a common central bank but not a common Treasury.

'Either Europe now takes the institutional measures that are needed to make up for the deficiency or, in fact, it may not survive,' said Mr. Soros. Soros Fund Management is one of several heavyweight hedge funds that are betting that the Greek-debt woes will push the euro lower.

Luca Di Leo
at 2:20 AM 0 comments   
Labels: Currency, Europe, Gold, Soros

February 21, 2010

George Soros: The euro will face bigger tests than Greece
The euro will face bigger tests than Greece
By George Soros
Published: February 21 2010 18:40 | Last updated: February 21 2010 18:46
Otmar Issing, one of the fathers of the euro, correctly states the principle on which the single currency was founded. As he wrote in the FT last week, the euro was meant to be a monetary union but not a political one. Participating states established a common central bank but refused to surrender the right to tax their citizens to a common authority. This principle was enshrined in the Maastricht treaty and has since been rigorously interpreted by the German constitutional court. The euro was a unique and unusual construction whose viability is now being tested.

The construction is patently flawed. A fully fledged currency requires both a central bank and a Treasury. The Treasury need not be used to tax citizens on an everyday basis but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency. This is a well-known fact that should have been clear to everyone involved in the creation of the euro. Mr Issing admits that he was among those who believed that “starting monetary union without having established a political union was putting the cart before the horse”.

EDITOR’S CHOICE
Tommaso Padoa-Schioppa: Europe cannot afford to let Athens stand alone - Feb-18

Otmar Issing: Europe must not rescue Greece - Feb-15

Samuel Brittan: Greek light on an over-hasty project - Feb-18

In depth: Greece debt crisis - Feb-16

The European Union was brought into existence by putting the cart before the horse: setting limited but politically attainable targets and timetables, knowing full well that they would not be sufficient and require further steps in due course. But for various reasons the process gradually ground to a halt. The EU is now largely frozen in its present shape.

The same applies to the euro. The crash of 2008 revealed the flaw in its construction when members had to rescue their banking systems independently. The Greek debt crisis brought matters to a climax. If member countries cannot take the next steps forward, the euro may fall apart.

The original construction of the euro postulated that members would abide by the limits set by Maastricht. But previous Greek governments egregiously violated those limits. The government of George Papandreou, elected last October with a mandate to clean house, revealed that the budget deficit reached 12.7 per cent in 2009, shocking both the European authorities and the markets.

The European authorities accepted a plan that would reduce the deficit gradually with a first instalment of 4 per cent, but markets were not reassured. The risk premium on Greek government bonds continues to hover around 3 per cent, depriving Greece of much of the benefit of euro membership. If this continues, there is a real danger that Greece may not be able to extricate itself from its predicament whatever it does. Further budget cuts would further depress economic activity, reducing tax revenues and worsening the debt-to-GNP ratio. Given that danger, the risk premium will not revert to its previous level in the absence of outside assistance.

The situation is aggravated by the market in credit default swaps, which is biased in favour of those who speculate on failure. Being long CDS, the risk automatically declines if they are wrong. This is the opposite of selling short stocks, where being wrong the risk automatically increases. Speculation in CDS may drive the risk premium higher.

Recognising the need, the last Ecofin meeting of EU finance ministers for the first time committed itself “to safeguard financial stability in the euro area as a whole”. But they have not yet found a mechanism for doing it because the present institutional arrangements do not provide one – although Article 123 of the Lisbon treaty establishes a legal basis for it. The most effective solution would be to issue jointly and severally guaranteed eurobonds to refinance, say, 75 per cent of the maturing debt as long as Greece meets its targets, leaving Athens to finance the rest of its needs as best it can. This would significantly reduce the cost of financing and it would be the equivalent of the International Monetary Fund disbursing conditional loans in tranches.

But this is politically impossible at present because Germany is adamantly opposed to serving as the deep pocket for its profligate partners. Therefore makeshift arrangements will have to be found.

The Papandreou government is determined to correct the abuses of the past and it enjoys remarkable public support. There have been mass protests and resistance from the old guard of the governing party, but the public seems ready to accept austerity as long as it sees progress in correcting budgetary abuses – and there are plenty of abuses to allow progress.

So makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland. Together they constitute too large a portion of euroland to be helped in this way. The survival of Greece would still leave the future of the euro in question. Even if it handles the current crisis, what about the next one? It is clear what is needed: more intrusive monitoring and institutional arrangements for conditional assistance. A well-organised eurobond market would be desirable. The question is whether the political will for these steps can be generated.

The writer is chairman of Soros Fund Management and author of the Soros Lectures, published by PublicAffairs this month
at 7:16 PM 0 comments   
Labels: EUR/USD, Europe, Global Macro, Soros
February 14, 2010