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Anyone want to see a guy who is a magnet for money?

Discussion in 'Sports and News' started by The Big Ragu, Jan 28, 2011.

  1. The Big Ragu

    The Big Ragu Moderator Staff Member

    For those who don't know, John Paulson, runs a massive hedge fund. He was one of the few people who bet on the meltdown of the subprime mortgage market. He was short the derivatives that caused the financial meltdown, one of the few (a handful of people) who saw it coming and put a boatload of money at stake to profit from it, by going short the derivatives (which was almost impossible to do, because you had to create the mechanisms to do it). His funds made something like $15 billion in 2007, when all the big investment banks were about to go under (one of his hedge funds gained 590 percent, another 353 percent). It may have been the greatest trade in history. He makes George Soro's breaking the Bank of England and scoring a fortune cornering their currency in the early 90s look like small potatoes.

    Paulson seems to know what he is doing (blue font intended). I knew he has been making a killing investing in commodities last year, particularly gold, but I didn't know quite how much. Story in the Wall Street Journal today says he personally netted $5 billion in 2010 (more than the $4 billion he personally made on the subprime bet). By comparison, Goldman Sachs paid all of its employees (36,000 employees) a total of $8.35 billion last year. This guy had the potential to take home close to half of that himself this year, if he cashed out.

    If he is still banking on gold, though -- and who knows, because this guy has the midas touch (no pun intended) -- he has likely started out this year no where near as well. Gold is down 6 percent year to date.

    Still, I love following this guy. He won't even take new money (it's hard to deploy it with a trading strategy when you have such staggering sums to put to work -- if you are concentrating on a single market, there isn't enough liquidity to put tens of billion of dollars to work), yet he has somewhere close to $40 billion in assets under his control and his personal take home dwarfs even the most successful hedge fund managers.

    The guy really is a money magnet.

  2. YankeeFan

    YankeeFan Well-Known Member

    Is he the one who went to Goldman Sachs and had them put together a "basket" of mortgage backed securities specifically so that he could short it?

    If it is, I think it was brilliant, but a lot of folks were upset. GS put together the derivative because their customer though it would crash. Then they sold the other side of it to other customers of theirs and made money by charging fees to everyone involved.
  3. Azrael

    Azrael Well-Known Member

  4. I'm forwarding my paycheck to this man to invest.
  5. Boom_70

    Boom_70 Well-Known Member

    Ragu - what percentage of current price of gold do you think is based on Paulson throwing his investment dollars at it?
  6. doctorquant

    doctorquant Well-Known Member

    Yes, he's the one. It's alleged that he selected the CDOs that were part of that package.
  7. YankeeFan

    YankeeFan Well-Known Member

    That's what I thought.

    But, Goldman still sold them to institutional investors who had a responsibility to do due diligence. It's hard to feel sorry for anyone who took the other side of the trade.
  8. doctorquant

    doctorquant Well-Known Member

    In the hedging game, some people wanna buy risk, some people wanna sell it. Those institutional investors thought risk was priced too low, so they bought it. Paulson thought risk was priced too high, so he sold it.

    The absolute numbers are staggering, but Paulson's firm didn't do all that well last year. His funds' average profit was about 14%, and after he raked his fee off the top, his investors only got about 11%.
  9. Bob Cook

    Bob Cook Active Member

    At first I thought you were talking about whether I would pay to see a human magnet.
  10. The Big Ragu

    The Big Ragu Moderator Staff Member

    I am not following you. I am not absolutely certain, because he doesn't have to disclose this, but I believe Paulson used a strategy last year, where he was long gold and shorting euros as a way to profit from the U.S. dollar risk. Gold priced in Euros last year returned 37 percent. Maybe I am not understanding you, but it read like you suggested he was shorting gold. When the asset was up for the year, how would that have been a successful trading strategy? Anyone shorting gold did poorly last year.

    Also, Paulson offers a diversified set of funds now that invests in all kinds of asset classes--they are not funds he necessarily believes in. It's for clients who want to diversify across classes and do their own asset management. So looking at his fund's average profits (and I believe you have your numbers wrong) isn't very productive. For example, he offers funds that invest in credit opportunities and a recovery fund based on the U.S. economy (which actually performed relatively well), as well as various asset classes that were dog doo last year.

    It is clear that his personal money, as well as the money of his favored clients (who trust him to do their asset management) was in his Paulson & Co Gold Fund (investing as much in gold mining and exploration stocks as the physical commodity), which I believe was up more than 35 percent last year. He also invested a great deal in emerging markets in his Advantage Plus fund, which he actively manages, as well as a killer strategy late in the year of shorting the British banks, which made his investors a lot of money.

    The estimates I have seen is that he was up somewhere around 20 percent last year. Keep in mind, the industry average was 7 percent.
  11. doctorquant

    doctorquant Well-Known Member

    No, no, I was talking about the Goldman Sachs CDO deal. I don't know what Paulson's been up to lately.

    Re: the average return, I think you're right, I probably do have the numbers wrong. I was just ciphering based on the WSJ article. His performance fee, which they reported to be 20% of profit, was about $1 billion. That implies about $4 billion in overall profits to his clients. The WSJ also reported he had invested some $36 billion, but I don't know who owns what, so I can't compute an average rate for an investor.
  12. The Big Ragu

    The Big Ragu Moderator Staff Member

    Ah. I wasn't following.

    Yes, he rammed Goldman up their backsides. The best part is that they were laughing at him behind his back. They saw it as free money. The credit rating agencies were telling them the stuff was all AAA and AIG was insuring it. So they thought they were collecting free money (pennies, really--but millions of pennies) while this guy, who they thought was a foof, was waiting out something Goldman was sure wasn't going to happen. He basically just had to ride it out, and his other investments were paying enough to keep his investors happy so only a few complayed. He paid what amounted to insurance premiums every month, until the whole thing fell like a house of cards. And then he collected billions. Unlike the 5 or 6 other people who employed a similar strategy, and ended up sweating whether they would actually get paid, I believe he didn't have to worry about AIG going out of business (those idiots had their own business as the collateral) because he was first in line to collect.
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