John Paulson anticipated the collapse of the subprime mortgage market and positioned his firm to reap big returns
John Paulson is unassuming, as far as hedge fund managers go: His demeanor is quiet; his suits are somber; his offices are understated. His nerve, however, is formidable. Convinced that subprime mortgages would falter, the event-driven specialist did extensive research, hired staff with necessary expertise and in April 2005 began making a big bet, using credit default swaps to short the asset class. His timing was superb. Even as hedge funds with subprime exposure began imploding the Paulson funds exploded, with one-year returns three times those of the benchmark for the Paulson Partners Fund and six times the index return for the leveraged version of the merger arbitrage fund.
Paulson & Co.’s merger arbitrage/event-driven focus derived from Mr. Paulson’s early experience as an investment banker. After a first job with Odyssey Partners, his career went into high gear when he joined the mergers and acquisition practice at Bear Stearns Cos. Inc. Prior to founding Paulson & Co. in 1995, he was a general partner of Gruss Partners LP, a merger arbitrage specialist. In the course of his career, Mr. Paulson has dealt with a wide range of company transactions, including both friendly and hostile tender offers, mergers, divestitures, recapitalizations and other company reorganizations and financings.
What induced you to move into money management? When I in was in M&A at Bear Stearns, one of our clients was Marty Gruss. He ran a very successful risk arbitrage firm, Gruss Partners. … It was a small partnership and very profitable. Bears Stearns also was a partnership at the time and also very profitable. But it didn’t really compare to the type of profits that could be made in principal investing, investing your own money and earning the returns, rather than earning fees. I realized that there’s a limitation on what you can earn from fees and that the highest rewards would come from investing your own money, where there are no limitations on your earnings. That’s when I decided to move from investment banking to money management, and I became a general partner of Gruss Partners.
- Position: President, Paulson & Co Inc., New York
- Age: 51
- Assets under management as of June 1: $12.5 billion (95% from institutions)
- Number of employees: 45
- Education: BS in finance from New York University’s College of Business and Public Administration; MBA from Harvard University
- Personal: Married with two daughters
- Leisure interests: Running, skiing, sailing
- Performance (annualized net returns for periods ended as of April 30):
- Paulson Partners LP
- Year to date: 18.93% Hennessee Merger Arbitrage index: 4.84%
- One year: 31.06% Hennessee Merger Arbitrage index: 10.84%
- Three years: 17.17% Hennessee Merger Arbitrage index: 8.45%
- Paulson Partners Enhanced LP:
- Year to date: 35.88% Hennessee Merger Arbitrage index: 4.84%
- One year: 60.79% Hennessee Merger Arbitrage index: 10.84%
- Three years: 32.06% Hennessee Merger Arbitrage index: 8.45%
- Paulson Advantage LP
- Year to date: 19.28% Hennessee Event-driven index: 11.0%
- One year: 29.57% Hennessee Event-driven index: 17.51%
- Three years: 15.86% Hennessee Event-driven index: 12.88%