John Paulson is continuing to make hay while the financial storms rage.
John Paulson is continuing to make hay while the financial storms rage. His Credit Opportunities fund may only be up 12.4 per cent so far this year, after nearly 600 per cent in 2007, but it’s unlikely that any of his investors are complaining. However, other hedge fund managers are struggling to deal with an expected wave of redemptions over the next few months that could sweep away their business unless they take steps to keep redemptions within manageable proportions. RAB Capital has persuaded investors in its Special Situations strategy to lock up their capital for three years, but clients of other managers may not be so understanding.
Hedgeweek Comment: Turmoil, what turmoil?
Pick up any financial newspaper or business section from the past few weeks and you will find it very hard to come across a positive story. So the revelation by Financial News that hedge funds run by US manager John Paulson have posted not just positive but shoot-the-lights-out performance comes as striking contrast to the usual fare of bankruptcies, liquidations, takeovers, lawsuits and losses.
According to the report, the hedge funds run by Paulson & Co have bucked a trend of steady hedge fund losses this year by making returns of as much as 19 per cent in 2008 to date. One fund that generated 589.62 per cent achieved what is thought to be the largest dollar return in a year from a single hedge fund.
Last year Paulson turned USD500m in the firm’s Credit Opportunities Fund into USD3.5bn by shorting the sub-prime market, a feat considered by consultants and investors as the largest dollar amount ever generated by a hedge fund in a year.
Paulson’s USD9bn Advantage Plus fund is up 19.44 per cent this year, the Advantage Fund is up 13.22 per cent, the Credit Opportunities Fund up 12.46 per cent, the Enhanced Fund up 8.17 per cent and the International Fund up 5.17 per cent.
It is believed that Paulson has profited well from its short selling strategy. Last week it disclosed short positions in UK banks HBOS, Lloyds TSB, Barclays and Royal Bank of Scotland. If short selling of financial stocks is banned permanently, all eyes will be on Paulson’s next investment idea.
Funds prepare to counter potential redemptions
As fears of mass redemptions reverberate through the hedge fund industry, many managers are implementing defensive tactics to counter the possibility of investors withdrawing their capital. For example, RAB Capital has won a vote allowing it to freeze client redemptions from its flagship Special Situations fund for three years, which otherwise could have faced liquidation after its value fell by half this year.
The company reported that investors in the Cayman-domiciled fund approved the plan by a "considerable margin", with at least 75 percent of the company’s shares required to vote in favour in order to approve the plan. The fund had USD790m of assets as of September 25, compared with USD2bn at the end of last year. According to RAB chief executive Stephen Couttie, the three year lock-up is "the best way [for investors] to secure value from their investments".
To meet potentially large redemptions, hedge funds and the fund of funds that are their biggest investors are already holding record levels of cash. Some funds are freezing redemptions to give managers time to sell more illiquid assets to raise cash. Others are imposing a cap that limit the proportion of a fund’s capital that can be withdrawn by investors at any one time.
Those who can are opting for a longer-term strategy such as RAB’s move to lock up capital for the exceptionally long period of three years. But the firm was helped by investor confidence engendered by the previously stellar track record of the Special Situations strategy. Other managers may not enjoy the same faith on the part of their clients.
Donations from hedge funds – so what?
The UK media on Sunday were agog with the news that the Conservative Party, which is widely expected to regain power at the next general election, has taken large donations from hedge fund managers. David Cameron, the Tory leader, has reportedly accepted almost GBP2m from managers who supposedly have made vast sums of money from betting against some of Britain’s crisis-hit banks.
In particular, hedge funds have been widely blamed for sparking the slide in the share prices of banks such as Halifax Bank of Scotland, which was forced into an emergency rescue by Lloyds TSB, and Bradford & Bingley, which was nationalised yesterday. The headlines were lurid: "Cameron hit by new hedge fund row" and "Tories’ GBP3m booty from city sharks".
But let’s set the record straight. Accepting donations? That is completely legal. In fact, according to the Center for Responsive Politics, which tracks campaign contributions, US-presidential nominee Barack Obama has received money from many of the best-paid hedge fund managers, including Blue Ridge Capital Founder John Griffin, Stephen Mandel of Lone Pine Capital and the legendary George Soros.
And hedge funds making money through short-selling? Again, legal – at least it was before the short selling of financial stocks was (temporarily) banned by the Financial Services Authority 10 days ago.
Finally, hedge fund money influencing political decisions and party policy? Hardly, according to Cameron, who says: "They [hedge funds and bankers] don’t have any influence on my policy at all."
The bottom line is that party donations from financial institutions are a global phenomenon and are completely legal. And if they weren’t, there would be something wrong with our democracy.
Big time to small time
Alas! The day has come when bosses once at the helm of the world’s largest financial institutions are now taking up lower-profile posts in lesser-known businesses. For example, Stan O’Neal, the first big-name casualty of the credit crunch, is reported to be considering joining Vision Capital Advisors, a small hedge fund and private equity group.
This would mark a return to the financial industry for the former chief executive of Merrill Lynch. The Financial Times reported on Friday that O’Neal, who left Merrill a year ago with a pay-out estimated at USD161m, was looking at a number of options in addition to Vision and had not yet made up his mind.
Chuck Prince, who stepped down as chief executive of Citigroup shortly after O’Neal’s departure from Merrill, joined Stonebridge International, a strategic consulting firm, as vice-chairman. It is certainly a good post, but not in the same league as being the head of the world’s biggest bank.
What is the moral of this story? If top executives are taking a massive step down in their job status, where does this leave the average Joe? The full impact of job losses on the financial industry is not yet known, but one can take a guess. It will be a long time before the reverberations from this financial devastation cease.
