* Morgan Stanley offers new way to get with Paulson
* Appetite for Paulson persists amid talk of redemptions
* September returns eyed nervously
By Svea Herbst-Bayliss and Katya Wachtel
BOSTON/NEW YORK, Sept 29 Even as John Paulson's
largest hedge fund portfolios are clocking double-digit losses,
brokerage giant Morgan Stanley (MS.N) is helping some of its
wealthy clients put money with one of the industry's biggest
The brokerage is busy raising cash for a new investment
vehicle, the Morgan Stanley HedgePremier/Paulson Advantage Fund
II LP, that it launched earlier this year.
Morgan Stanley, in a recent regulatory filing, said it has
already raised $12 million for the vehicle. Through an earlier
offering, Morgan Stanley HedgePremier has sold access to John
Paulson since 2009.
The new offering comes at a critical time for the
billionaire hedge fund manager, who shot to fame with savvy
bets on gold in 2010 and against the housing market in 2007 and
2008 but has now crashed by being wrong on the global economic
recovery. Even his gold bet -- this year's winner -- has
suffered recently as the metal's price has tumbled.
Paulson's two largest funds lost more than 20 percent in
the first eight months of the year, and jittery investors
ranging from pension funds to wealthy private investors are
weighing whether to withdraw their money. Investors have not
yet heard how his funds fared in September.
PLENTY OF APPETITE
Even as talk swirls that Paulson will be forced to return
millions to disgruntled clients at the end of the year, some
brokers like Morgan Stanley are still sure there is plenty of
appetite to bet on Paulson.
"While underperformance is not good, and it depends on how
long it lasts, there will be more patience built in for Paulson
because he's performed so well in the past," said Chris Tobe,
an investment committee member at the Kentucky Retirement
Systems and a principal at Stable Value Consultants.
A Morgan Stanley spokesman said the Morgan Stanley
HedgePremier vehicle is a private placement offered through
Morgan Stanley Smith Barney and the firm is therefore not able
to comment on it.
A spokesman for Paulson also declined to comment.
In recent years, Paulson has relied mightily on large Wall
Street firms and small investment advisers to sell his funds to
wealthy clients. Even though direct investments in some of his
funds require a $10 million minimum, customers of Morgan
Stanley, UBS UBSN.VX, Bank of America Merrill Lynch and
others are able to sink money into those types of funds often
for as little a $150,000.
In August, Reuters wrote in a Special Report that these
lower minimums offered by a handful of Wall Street firms have
helped Paulson's firm grow dramatically in recent years. They
also helped make one of Wall Street's most lionized investors
accessible on Main Street. [ID:nL3E7JA4Y9].
Thanks to his successful bets over the years -- last year
alone he earned an estimated $5 billion on his gold bet --
Paulson has emerged as one of the $2 trillion hedge fund
industry's most closely followed investors.
For the 56-year-old Paulson, 2011 will surely go down as
the worst year in his decades-long career as a stock picker
known for taking big bets and patiently waiting for them to pay
While his firm started 2011 with some $38 billion --
ranking among the five biggest hedge funds in the world --
assets had shriveled to $32.8 billion by the end of August due
to heavy losses and redemptions, some investors said.
Paulson has bet aggressively on an economic rebound,
reasoning that bank stocks like Bank of America Corp (BAC.N)
should lend more as growth picks up.
At the start of the year, Paulson's Advantage portfolio had
a roughly 80 percent net long exposure, the manager told
investors this summer. By in the face of stagnating growth
rates hurt by persistently high U.S. unemployment and Europe's
debt crisis, Paulson has slashed that exposure to about 56
percent, people familiar with the numbers said.
Besides the big financial stocks that have hurt Paulson
this year, investors say they also worry about his large
illiquid bets on distressed credit.
Several hedge fund managers have expressed concerns about
the positions they share with Paulson. At a recent conference,
they said that if Paulson needs to sell in a hurry to raise
cash to meet redemptions, they could be bloodied along the
Guessing how much money Paulson has lost this month is one
of the hottest parlor games in the industry, but analysts and
investors say he has always been candid about his investing
style and that many will forgive an off year -- even if the
losses are very, very large.
As recently as this summer, Paulson reminded investors that
investing with him does not always make for a smooth ride. "He
has made a big macro call and he was very vocal about it and he
was very wrong," one investor said. "But he did not stray from
the things that he said he would do."
Indeed, several financial advisers who put their wealthy
clients with Paulson only this year said they are hanging on,
reasoning that a manager who was able to deliver triple-digit
returns one year is bound to have a loss now and then and can
recover in the months ahead.
And with the losses he has suffered this year, Paulson is
not going to be charging the hefty performance fees that make
many managers rich. "He will work for free for you for a while,
so why not stay?" said another investor, who asked not to be
(Reporting by Svea Herbst-Bayliss; editing by Matthew
Goldstein and John Wallace)