John Paulson, the hedge-fund manager trying to recover from more than two years of losses in some of his funds, told investors he likes convertible bonds, according to a person familiar with the matter.
Paulson, speaking on a conference call with clients today, also said mortgage-backed securities have been performing well within the New York-based firm’s Credit Opportunities Fund, according to a person who listened and asked not to be identified because the information isn’t public. The strategy is Paulson’s biggest, with $5.9 billion in assets, according to a letter to investors that was obtained by Bloomberg News.
Armel Leslie, a spokesman at Walek & Associates for $18 billion Paulson & Co., declined to comment on the call.
The 57-year-old hedge-fund manager is trying to rebound from losses posted since 2011 in some funds after wrong-way bets on gold, equities related to the metal, the European debt crisis and the U.S. economy. Paulson became a billionaire by betting against the U.S. subprime mortgage market in 2007, a year in which the Credit Opportunities Fund surged 591 percent, according to the letter to investors.
The fund gained 10 percent this year through March after climbing 9.5 percent in 2012, according to the letter. Paulson’s $700 million Gold Fund, his smallest vehicle, slumped 28 percent this year after dropping 25 percent in 2012. The firm’s Advantage Plus fund, an event-driven strategy with $4.5 billion, rose 4.6 percent in 2013 after falling 19 percent in 2012.
Convertible bonds made up the largest portion of the firm’s credit strategy at 25 percent, as of the end of March, and mortgage-backed securities comprised 20 percent, the third- largest total, according to the letter. Convertible bonds are debt securities that can be converted to a company’s equity under preset conditions.
Paulson & Co. held 11 percent of the convertible bonds in Realogy Holdings Corp., the real estate brokerage company backed by Apollo Global Management LLC (APO:US) that went public in October 2012, after which the firm converted the debt into equity, it said in the letter. Realogy has climbed 14 percent this year. Paulson’s shares are locked up until June, after which the firm plans to exit its position “over time,” it said.
Convertible bonds rose 7.9 percent in the first quarter and 9.9 percent last year, compared with returns for investment- grade corporate bonds of 1.5 percent this year and 10 percent in 2012, according to Bank of America Merrill Lynch data. The Standard & Poor’s 500 Index increased 11 percent, with reinvested dividends, in the first three months of 2013 and 16 percent last year.
Paulson’s Advantage fund, which employs a similar strategy as Advantage Plus and seeks to profit from corporate events such as takeovers and bankruptcies, climbed 3.4 percent in the first quarter. Had the fund not been invested in gold equities, it would have been up about 8 percent to 9 percent, Paulson is said to have told investors on the conference call. The fund would have gained 15 percent this year through yesterday without its investment in bullion miners, Paulson said, according to the person. Shares of gold producers comprised about 25 percent of the Advantage strategy as of last year.
Paulson’s Gold Fund and Advantage funds, as well as his gold share classes -- most of his funds have separate versions denominated in the U.S. dollar or the metal -- may be hurt this month by gold’s 13 percent drop in two sessions through the 15th, the biggest slump since 1980. Futures, which touched $1,321.50 on April 16, the lowest since January 2011, have since risen to about $1,424 as of 1:30 p.m. in New York.
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