Bloomberg News

Paulson Extends Comeback With Merger Bets as Stocks Rally

December 09, 2013

Paulson & Co. Founder John Paulson

John Paulson, best known for making $15 billion in 2007 betting against subprime mortgages, is rebounding with prescient bets on companies in takeovers, a strategy known as merger-arbitrage where got his start as a trader, and by investing in stocks that surged as global central bank policies propped up markets. Photographer: Rick Maiman/Bloomberg

It’s been a comeback year for John Paulson.

After wrong-way bets on the U.S. recovery, the euro crisis and gold had helped cut assets by about half from the 2011 peak, his main hedge funds are posting double-digit returns. The New York-based firm’s Advantage strategy, which suffered record losses in 2011, is up 30 percent this year through November, and the Recovery fund surged 55 percent, according to two people briefed on the returns, who asked not to be identified because the information is private.

Paulson, 57 and best known for making $15 billion in 2007 betting against subprime mortgages, is rebounding with prescient bets on companies in takeovers, a strategy known as merger-arbitrage where he got his start as a trader, and by investing in stocks that surged as global central bank policies propped up markets. The one sore spot remains his gold fund, which has shriveled to $370 million, most of that the billionaire’s own money.

Related: John Paulson’s Main Strategies Said to Rise in November

“He’s still a legendary investor on Wall Street and the fact that he’s gone back to basics is positive,” said Jay Rogers, president of Irvine, California-based Alpha Strategies Investment Consulting Inc., which advises hedge-fund clients and managers. “He got distracted with gold but it’s a small percentage of his money overall.”

Armel Leslie, a spokesman for Paulson & Co. with WalekPeppercomm, declined to comment on the returns.

Macro Trades

For much of the recent years since rising to fame with his bet against the U.S. housing market, Paulson had stumbled from one losing trade on macroeconomic trends to another. He was too optimistic about the U.S. economic recovery and overly bearish about the European debt crisis. Gold, which Paulson forecast would strengthen as investors sought a hedge against inflation, instead entered a bear market.

Slideshow: The Best and Worst Investments of 2013

Once one of the world’s biggest hedge-fund firms, New York-based Paulson & Co.’s assets slid to about $18 billion earlier this year, from a peak of $38 billion in 2011.

Gains this year helped push assets to $20 billion. More than 75 percent of Paulson & Co.’s capital had surpassed their previous peak net asset values, the firm told investors in August.

Beating Peers

While the rebound reflects to some extent the rally in global stocks, Paulson did better than most peers. The average hedge fund returned 7.1 percent in the year’s first 11 months, according to data compiled by Bloomberg. Among other big firms, Renaissance Technologies LLC rose 18 percent in its Institutional Equities Fund, Tudor Investment Corp. gained 12 percent in its BVI Global fund and Bridgewater Associates LP climbed 6.1 percent in its Pure Alpha II, according to people briefed on the results.

“In 2013, the equity markets have driven performance for a lot of managers,” said Rogers at Alpha Strategies.

All of Paulson’s biggest strategies gained last month, led by the event-driven Advantage fund, which surged 13 percent during November. The Recovery fund, which buys stocks that will profit from an economic rebound, rose 6.5 percent in the month. Industrywide, hedge funds gained 0.2 percent in the month, according to data compiled by Bloomberg.

In part, the gains reflect successful bets on banks, hotels and real estate that gained in a growing economy, including Extended Stay America Inc. (STAY:US), the largest owner of mid-price long-stay hotels in the U.S. The stock surged 26 percent from its trading debut on Nov. 13 through the end of the month.

Extended Stay

Paulson & Co., Blackstone Group LP and Centerbridge Partners LP bought Extended Stay out of bankruptcy three years ago. The company’s initial public offering represented a surge in value for the owners after a pickup in the U.S. hotel market.

The firms benefited from a rebound in lending after the Federal Reserve pushed down interest rates to almost zero, fueling demand for riskier assets. They borrowed $3.6 billion in November 2012 to refinance Extended Stay’s debt, allowing them to recoup about half their equity investment. The investment exemplifies Paulson’s knack for betting on companies in post-bankruptcy reorganization, and in those poised to profit from a strong stock market and economic turnaround.

The Recovery fund, which had $2.4 billion in assets as of Nov. 1, also profited as MGM Resorts International (MGM:US) soared 65 percent through November after improved results on the Las Vegas Strip and at the company’s Macau casino, according to a third-quarter letter to investors.

Merger Roots

Paulson, who had worked at merger-arbitrage pioneer Gruss & Co. before starting his own firm, posted a 28 percent gain this year through November in his leveraged Paulson Partners Enhanced fund, according to the people.

Successful investments included wagers on telecommunications takeovers such as Sprint Corp., as SoftBank Corp. engaged in a bidding war with Dish Network Corp. before completing the $21.6 billion acquisition in July. The combination of Deutsche Telekom AG’s T-Mobile USA unit with MetroPCS Communications Inc., and AT&T Inc.’s announced $4.1 billion takeover of Leap Wireless International Inc. also paid off.

The fund profited from Life Technologies Corp., after Thermo Fisher Scientific Inc. agreed in April to buy the company, and on Irish drugmaker Elan Corp., which Perrigo Co., a maker of over-the-counter medicines, agreed to purchase in July.

Paulson Partners, the unleveraged version of the strategy, increased 16 percent year-to-date.

High-Water Marks

Not all investors have been made whole yet. Paulson & Co.’s event-driven Advantage funds, which have $4.3 billion in assets, are still below their high-water marks. The firm can’t charge performance fees to investors in those funds until recouping losses from 2011, when it made wrong-way bets on a U.S. economic recovery, and 2012, when it lost money by wagering on a worsening European debt crisis and rising gold stocks.

The gold fund has lost 63 percent year-to-date through October. Last month, Paulson told clients at his firm’s annual meeting that he personally wouldn’t invest more money in the fund because it’s not clear when inflation will accelerate.

To contact the reporter on this story: Kelly Bit in New York at kbit@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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Companies Mentioned

  • STAY
    (Extended Stay America Inc)
    • $18.64 USD
    • -0.02
    • -0.11%
  • MGM
    (MGM Resorts International)
    • $22.82 USD
    • 0.01
    • 0.04%
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