Don’t Try to Benefit From John Paulson’s Epic Implosion

by Tom Taulli | September 29, 2011 10:37 am

In the hedge fund world, lots of managers eventually put together a hot streak. But eventually, they hit the wall and sustain huge losses. It is only a handful of managers that have been able to generate standout returns for the long haul, such as Paul Tudor Jones and George Soros.

Interestingly enough, another investor looked like he could join these elite ranks: John Paulson. During 2005, he had the foresight to short the subprime market. Then a few years later, he invested in financial stocks and gold. As a result, Paulson amassed billions for himself and his investors.

But this year, his streak turned into a slump, and Paulson’s flagship Advantage fund is off over 30% (as of the end of August).

Now it looks like other hedge funds are trying to find opportunities — that is, to pounce on Paulson. After all, it’s likely his investors will start redeeming their holdings, which will force selling.

So which shares could be vulnerable? According to the latest securities filings, some of Paulson’s top holdings include Citigroup (NYSE:C[1]), Wells Fargo (NYSE:WFC[2]), Transocean (NYSE:RIG[3]) and Hewlett-Packard (NYSE:HPQ[4]).

True, these shares already have seen price drops. But with the redemption deadline for hedge funds coming at the end of October, Paulson might have no choice but to lighten up on plenty of his positions (this might be the case with other hedge funds as well).

Yet trading this event could be extremely tough, especially for retail investors. Keep in mind that Paulson’s holdings are highly liquid stocks. So if there is some dumping, the price impacts are likely to be temporary — if even noticeable.

There also is buzz that Paulson might be forced to sell gold. Keep in mind that he has gold-denominated funds and he also is the largest holder of the SPDR Gold Trust (NYSE:GLD[5]). But again, even if there is a major selloff to get liquidity, the impact is likely to be short-lived. After all, gold is a large global market.

Besides, it still is unclear if Paulson will have wide-scale redemptions. Even though his recent losses have been substantial, he does have investors who have generated significant returns throughout the years. Is one year really enough to bail out?

Actually, Paulson might take steps to make concessions to his investors, such as lowering his fees. This is not uncommon in the hedge fund industry.

So while it might be temping to find opportunities from Paulson’s distress — and it certainly points out that even top investors are far from perfect — it probably will not be not worth the trouble.

Tom Taulli is the author of “All About Short Selling”[6] and “All About Commodities.”[7] You can also find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.

  1. C:
  2. WFC:
  3. RIG:
  4. HPQ:
  5. GLD:
  6. “All About Short Selling”:
  7. “All About Commodities.”:

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