By Svea Herbst-Bayliss and Katya Wachtel
BOSTON/NEW YORK, April 18 Hedge fund billionaire
John Paulson's best-known fund is down 2.4 percent in April,
largely due to the sharp selloff in gold, a source familiar with
the numbers said on Thursday.
The Paulson & Co Advantage fund is making money for the
year, but just barely, with a 1.3 percent gain, the source said.
The fund's substantial holdings in several gold mining
stocks, including a bet on AngloGold Ashanti Ltd, which
is down 40 percent this year, have dramatically cut into the
Advantage fund's returns.
Gold is one of the worst performing assets this year after
rising mightily following the financial crisis. The precious
metal has fallen 17 percent this year, including a 13 percent
drop in April alone.
Shares of companies tied to the performance of gold,
including the SPDR Gold Trust, the biggest gold
exchange-traded fund, also have fallen sharply. This year
investors have pulled $10 billion out of the gold ETF as of
Wednesday, said financial information firm Markit.
The sharp slide appears to have caught a number of hedge
fund managers like Paulson by surprise. Next week he intends to
update his clients about all of his funds, including a fund
dedicated specifically to investing in gold, several sources
Paulson, who has made money on gold up until this year, has
long held firm to the view that inflation will eventually
rebound, making gold a prudent hedge. But in the wake of the
selloff, the firm has incurred losses in the hundreds of
millions of dollars in several funds that invest in gold, said
people familiar with the firm.
The fund manager, lionized after a big bet against the
overheated housing market in 2007 that made billions for his
investors, has floundered trying to repeat the success in recent
Assets at his firm have dropped to $18 billion down from $38
billion in early 2011 due to redemptions and poor performance.
Over the past two years, the Advantage fund and a leveraged
version of the fund have posted some of the worst numbers in the
$2.2 trillion hedge fund industry.
At the end of the first quarter, the Advantage strategy,
which includes the two funds and managed accounts, had about
$4.6 billion in assets.
STICKING WITH GOLD
Still, Paulson is sticking with his plan. "The recent
decline in gold prices has not changed our intermediate- to
long-term thesis," Paulson partner John Reade said earlier this
A Paulson spokesman would not comment on the April numbers
for the Advantage Fund.
For the New York-based fund manager, gold's drop is another
in a string of black eyes. He has also taken heavy losses on
some big investments, including in Chinese forestry company
Sino-Forest Corp and Bank of America Corp. In 2011, the
Advantage Fund's sister fund, Advantage Plus, lost more than
half of its value.
The Advantage Fund's performance this year also leaves
Paulson near the bottom of the rankings. Some hedge fund
managers are reporting double-digit gains, but most were up only
3 percent in the first quarter. The Standard & Poor's 500 index
was up 10 percent.
Paulson's fund is not alone in holding fast to the notion
that gold is still an asset to hold.
In a research note this week, Ray Dalio's $141 billion
Bridgewater Associates wrote that while the magnitude of the
selling in gold was surprising, much of it was driven by selling
by "weak" and leveraged hands.
However, several investment banks beginning with Goldman
Sachs cut their 2013 gold price forecasts over the past
two weeks. Any fund that uses technical analysis to buy and sell
securities is selling gold now, a Wall Street analyst who was
not authorized to speak publicly said.
Other investors say some hedge fund managers have lost a lot
of money on gold because they did not hedge the bet properly.
"Most people who are long gold are only long," said John
Burbank, who runs hedge fund Passport Capital. He said his own
fund hedged by owning physical gold and betting against gold
mining companies, whose share prices have dropped dramatically.
Burbank said his company employs two geologists to dig
deeply into the gold mining companies. "Other firms don't have
that," he said.
In addition to Paulson, other well-known hedge fund managers
David Einhorn and Daniel Loeb are also victims of the recent
Loeb said gold was one of his Third Point hedge fund's
biggest losers in the first quarter in a recent investor letter.
Einhorn's Greenlight Capital Management recently listed gold as
one of his five largest positions. He is believed to largely own
physical gold as opposed to shares in the exchange-traded fund.
Any hedge fund with large gold positions, whether in its
physical form or through equities, is being hurt, said the Wall
Other investors had better timing and slashed gold
investments before the metal began to nosedive this year.
Billionaire George Soros significantly reduced his gold exposure
in the fourth quarter of last year, for example, and recently
said the asset was "destroyed as a safe haven".
Hedge funds Moore Capital Management and Lone Pine both got
rid of stakes in the SPDR Gold Trust ETF at the end of the year,
regulatory filings show.