Paulson Too Big To Succeed?

Mar 30 2010 | 1:46pm ET

Is Paulson & Co. primed for a big fall? Some say the New York-based hedge fund, little known three years ago and now the third-largest hedge fund in the world, is too big to succeed, Bloomberg News reports.

Paulson managed $32 billion at the beginning of the year. But despite the fund’s size, founder John Paulson has not closed the fund to new investment and is continuing to take in new money. And there are plenty of investors lining up, given the firm’s remarkable run of performance since turning in triple-digit returns betting against subprime mortgages in 2007.

But the firm’s returns have slowed since it made a name for itself amidst the credit crisis. Last year, Paulson lagged its hedge fund peers, and is doing so again in the early going of this year.

“As with all managers that bulk up, there’s always the risk of returns becoming mediocre,” Richard Tomlinson, a hedge fund consultant, told Bloomberg.

Or worse: Bloomberg suggests that Paulson’s trajectory is similar to that of three other once-giant hedge funds that suffered a mighty fall: Soros Fund Management, Tiger Management and Citadel Investment Group.

The former two were the only $20 billion hedge funds in 1998. By the end of 2000, both had taken big losses and stopped managing outside money. In the case of Citadel, the Chicago-based alternative investments giant had grown to $20 billion by 2008, only to see its flagship hedge funds lose more than half their value that year.

“There is a point where you can be too big to generate returns,” Lawrence Chiarello of SkyView Investment Advisors told Bloomberg. “Being large and able to build a strong infrastructure are good things, but in general I think the pendulum has swung too far.”

Indeed, according to Bloomberg, Paulson is more like its doomed predecessors than the two hedge funds that top it in the league tables, JPMorgan Chase and Bridgewater Associates. While the latter two favor many small bets, Paulson’s funds tend to be more concentrated, increasing the risk of catastrophic losses.


In Depth

Whisky Business: The Ultimate Liquid Alternative Investment

Sep 15 2014 | 7:02am ET

David Robertson knows his single-malt whisky—he was the Master Distiller at the...

Lifestyle

Hedgies Rock Out For Children's Charity

Sep 15 2014 | 8:40am ET

It's that time of year again—when hedgies trade in their spreadsheets for guitars...

Guest Contributor

Volkered: How Financial Sector Reforms are Creating Opportunities for Hedge Funds

Sep 16 2014 | 11:28am ET

New regulations have dramatically curtailed proprietary trading activity in investment...

 

Editor's Note

    Get A Sneak Peak Of The Alpha Pages

    Aug 25 2014 | 11:21am ET

    As many of you know, FINalternatives was recently acquired by the owners of Futures magazine, a firm called The Alpha Pages LLC. Today marks the soft-launch of a new sister site for both publications. As its name suggests, The Alpha Pages will cover all types of alternative investments, going far beyond the more well-known ones such as hedge funds and private equity. Read more…

 

Futures Magazine

July/August 2014 Cover

In search of the ‘new normal’ at the Fed

The Federal Reserve keeps baby-stepping toward a “normalization” of monetary policy. But just what is normal?

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.