Hedge fund chief Paulson loses big on gold

NEW YORK Tue May 7, 2013 2:25pm EDT

President and Portfolio Manager of Paulson & Co. John Paulson speaks during the Sohn Investment Conference in New York, May 16, 2012. REUTERS/Eduardo Munoz

President and Portfolio Manager of Paulson & Co. John Paulson speaks during the Sohn Investment Conference in New York, May 16, 2012.

Credit: Reuters/Eduardo Munoz

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NEW YORK (Reuters) - Hedge fund billionaire John Paulson is emerging as one of the biggest losers in this year's gold rout, further tarnishing his once legendary status in the $2 trillion hedge fund industry.

Paulson's $700 million gold fund lost a whopping 27 percent in April, when the price of the metal plunged 17 percent over a two-week stretch, according to performance figures provided by a person familiar with the fund.

The jarring one-month decline in the Paulson gold fund brings the year-to-date loss for the fund to about 47 percent, the source said. The fund's losses were magnified by the fact that its bullish bet on gold was enhanced with leverage, or borrowed money, and derivatives tied to the price of gold.

The majority of the money invested in the Paulson gold fund is believed to be the billionaire's own.

Paulson rose to fame after he made $15 billion for his firm in 2007 by betting against subprime mortgages before the housing collapse. Since then, however, he has struggled to duplicate that success, and several of his portfolios have lagged in recent years.

Assets under management at his Paulson & Co firm have dropped to $18 billion, down from $38 billion in early 2011, due to investor redemptions and poor performance.

To be fair, the April selloff in gold was particularly fierce and came as a surprise to many hedge fund managers who were long either gold bullion or the SPDR Gold Trust, the most popular gold exchange-traded fund.

Hedge fund manager David Einhorn said on a conference call on Tuesday, "We were somewhat surprised by the swift decline in the price of gold in April."

Paulson disclosed the gold fund loss to investors on Monday along with results for his other funds, the source said.

Over two weeks in April, the price of gold plunged 17 percent, from $1,603 per ounce to a low of $1,321 on April 16, before starting to rebound. As of Tuesday, the metal was trading near $1,446.

Regulatory filings show that at the end of last year Paulson's firm was the largest holder of the SPDR Gold ETF, with 21.8 million shares. Paulson has not yet disclosed its latest position in the gold ETF. Since the beginning of the year, the gold ETF has fallen about 14 percent.

Paulson's hedge funds also are large investors in shares of gold mining companies, which similarly have sold off this year.

Until this year, gold had been a solid investment. In the wake of the financial crisis, a number of hedge funds began buying gold as a hedge against inflation. But inflation has yet to materialize, despite the Federal Reserve's aggressive purchases of Treasuries and mortgage bonds to stoke the economy.

Paulson's more widely held Advantage fund declined 0.8 percent in April, largely because of its gold positions, the source said, and is up 2.5 percent for the year through April.

The Advantage fund and a leveraged version of it were once two of Paulson's most popular funds but now have less than $5 billion in assets.

The average hedge fund is up a little over 3 percent this year, while the Standard & Poor's 500 is up about 13 percent.

It's not been all bad news for Paulson. Two other funds managed by him are performing well this year and far outpacing the returns of the average hedge fund.

His credit-focused fund, which invests in mortgage securities and bank debt, is up 11.9 percent for the year. The Paulson Recovery fund, which invests in some insurers and asset management firms, is up 21.8 percent. And a merger-focused fund is up 7.1 percent.

Paulson will be one of the featured speakers at this week's SALT Conference in Las Vegas, a popular event with wealthy investors. The conference, sponsored by Skybridge Capital, begins Tuesday night.

(Reporting by Katya Wachtel; additional reporting by Svea Herbst-Bayliss and writing by Matthew Goldstein; Editing by Chizu Nomiyama, Kenneth Barry and John Wallace)

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Comments (3)
thomas728 wrote:
“All in” rarely produces great results.The CDO trades made a fortune for Paulson,his clients and the boys at Goldman…you try for another home run and it’s strike three.Gee…I don’t feel the least bit sorry for this lot.

It always stands that Gold is not a currency unless the Russians are in Vermont.

May 07, 2013 3:58pm EDT  --  Report as abuse
Duffminster wrote:
Paulson’s instincts are correct. Unfortunately, what the Fed and ECB want is for gold not to be seen for its actual value but to drive everyone into the stock market. The massive sell off in gold futures was done in such a way as to run the stops and bring in margin calls. For those who believe that the new paradigm of ever increasing debt and the monetization of that debt by central banks (QE to Infinity) as the basis for economic “recovery” and economic “growth” they can argue that the underlying currencies backed only by this completely unrepayable toxic sovereign debt will hold its value. Given that the dollar has fallen about 98% in value since the inception of the Federal Reserve and that the correlation between the Fed balance sheet growth and gold price increases has been quite tightly coupled the last 13 years, I would say that the chart painting of gold price will have limited efficacy as most of the weak hands have given their gold over to the Chinese. With headlines like this (keep in mind this was before the big take down in the futures markets (likely with naked shorts in my opinion) and that demand for physical gold has sky rocketed since, there is in only so long the deception can be maintained. The stock market is going up on vaporous volume even as sales and revenue projections continue to falter and actual growth seems unlikely under the strain of endless debt. Paulson’s thinking is right on. He simply should have been investing in physical gold instead of ETFs with their double entry accounting (able to short and go long on the same share), and looking at who the custodians of the gold and silver are, he wasn’t cynical enough. If he holds long term and rotates into physical, he will prove his brilliance once and for all.

May 07, 2013 4:23pm EDT  --  Report as abuse
Duffminster wrote:
In the previous comment I forgot to sight the article title I mentioned ”
China‚Äôs Gold Consumption Jumps 26% in First Quarter Before Rout”

May 07, 2013 4:48pm EDT  --  Report as abuse
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