Paulson & Co. Inc. is on track to survive a reversal of fortune that sources say very few other hedge fund managers could withstand.
Assets declined $17 billion — 44.9% — to $21 billion as of June 30, down from a peak of $38.1 billion in February 2011. Much of the loss is the result of poor performance over the past year of the New York-based company's flagship Advantage event-driven arbitrage strategy, although there have been modest investor redemptions, sources said.
The offshore version of Paulson Advantage Plus Ltd., which uses mild leverage, was down 35% in 2011 and 17.7% year-to-date June 30. The non-leveraged version of the strategy, Paulson Advantage Ltd., was down 36% last year and fell 11.61% in the first half of 2012.
But the firm has a saving grace: About 60%, or $12.6 billion of June 30 assets are from employees. Observers said it is impossible to know how much of that employee asset pool belongs to John Paulson, the firm's founder and president, but they speculate it is the vast majority. (By contrast, about 31% or 32% of Paulson & Co.'s assets are from institutional investors.)
One source said the hedge fund manager's size at its peak — before the performance decline — combined with the high percentage of employee capital have insulated Paulson from the crippling impacts that performance declines of this size and client redemptions would wreak on other firms.
“It's impossible for any other hedge fund firm to lose $17 billion and still be in business,” said the source, who asked for anonymity.
“The firm will not fall apart because of this. Just John (Paulson's) money alone is enough to keep the firm in business. But he is not going anywhere. There are absolutely no signs that John Paulson intends to do anything other than manage his way out of this.”
Mr. Paulson and other executives at the firm declined to comment, said Armel Leslie, a spokesman.