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.


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