Two Paulson Hedge Funds Suffer Big Losses in September 2014

October 31, 2014

John Paulson has been a widely followed fund manager in the hedge fund circle ever since he thrust himself into the spotlight in 2008, a year in which the S&P 500 index lost almost 40 percent. Relatively unknown at that time, Paulson collected billions in profit that year as a result of his bold bet that the US housing market would collapse. His performance since that time, however, has been far from stellar. After seeing the assets under management drop to $18 billion in 2012 from a peak of $38 billion, Paulson rebounded in 2013 with an impressive performance but his rebound again seems to have hit a wall. According to Bloomberg, two of Paulson’s main funds have suffered significant losses in the month of September 2014.

Volatile Fund

Citing sources with knowledge of the fund’s returns, Bloomberg is reporting that Paulson’s Advantage Fund, which looks for investment opportunities in corporate events such as spinoffs and bankruptcies, slumped 8 percent in September. The monthly loss widened the fund’s year to date losses to 13 percent.

Another fund within the Paulson family of hedge funds is the Advantage Plus Fund, which follows the same event driven strategy, but is a leveraged version of Advantage Fund. This leveraged fund lost 11 percent in September, taking the year to date loss to 14 percent.

The steep losses for Paulson’s funds during the month were driven by a collapse in the stock price of the hedge fund’s two large holdings. One of them is the government mortgage company Fannie Mae, which lost over half its value in September due to an unfavorable court ruling. The other unusually large loss for the hedge fund last month was its investment in Irish drug company Shire PLC which gave up 30 percent of its value after its planned acquisition by Chicago-based biotech firm AbbVie unexpectedly fell through.

Hedge Funds Struggle

According to data provider Preqin, hedge funds had their first losing quarter in over two years in the just concluded third quarter. Hedge funds lost 0.4 percent during the third quarter due largely to a loss of 1.4 percent by North America-focused funds. For the first nine months of the year, hedge fund returns averaged 3.3 percent compared with returns of 7.8 percent for the same period last year. In comparison, the S&P 500 index gained 1.14 percent in the third quarter, taking its overall gains for the first three quarters of the year to 8 percent. Despite the underperformance, hedge fund assets have continued to increase on strong capital inflow. According to Hedge Fund Research, assets at the end of the third quarter have reached approximately $2.82 trillion.

Relevance to Job Market

The performance of the two Paulson hedge funds in September brings to light that even large funds are vulnerable to big losses and wild swings when their large holdings take a hit. It is also a reminder that even hedge fund managers with a history of generating outsized returns are not immune from sudden, dramatic declines. The Preqin data for the third quarter continues the trend of hedge funds underperforming in the last six years. The net effect on job prospects is likely to be neutral as despite mediocre performance as the hedge fund industry continues to benefit from new capital inflow.

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