Paolo Pellegrini Follows Druckenmiller Into The Sunset: Paulson Protege To Return All Capital To Investors
When we reported that Stanley Druckenmiller had decided to call it a day after a 30 year career, we joked that his action was a stark confirmation that alpha was dead, as more and more hedge funds are increasingly unable to eek out incremental returns over risk free, thereby rendering the whole 2 and 20 business model meaningless. Today, we get more confirmation that ever more of the "smartest money" on the street is packing it in (at least temporariliy) after Absolute Return+Alpha reports that the man behind the Paulson CDO trade, Paulo Pellegrini has decided to return investor capital and is stepping back from managing investor capital "given challenging market conditions." "Paolo Pellegrini announced today that he will be returning all outside investors' capital in his global macro firm PSQR Capital by the end of September, citing the additional work necessary to profit from his bearish views." As a reminder, as of his first letter (posted below), the fund was up 175.5% through September 2009 from inception in April 15, 2008. One wonders how much pain Pellegrini may have suffered, considering his main bets, at least as of a year ago, were short Treasuries and short equities.
We turned bearish on long-dated US Treasuries in early 2008 because we expected a massive policy response, both monetary and fiscal, to the economic crisis that was taking shape. Shorting Treasury futures worked relatively well early in the year. To limit the event risk in the Treasury short position, we started shorting equities as well, primarily S&P futures. Intuitively and empirically, one would expect equities and Treasury securities to be anti-correlated with respect to event risk. Shorting Treasury and the S&P futures together did reduce volatility for a time but proved challenging in July and August, when in some cases the two instruments appreciated at the same time.
It is an unfortunate reminder that even though you may be right on Wall Street if you get the timing off, it does not matter. This is precisely one such case. While eventually bonds will crash and burn (and yes, it is a bubble), for the time being, expectations are that the 30 Year will soon plunge below 3%, even as well over $10 trillion in backlogged issuance is coming down over the next decade.
While we wish Pellegrini all the best, somehow we are confident he will do just fine with even the "meager" personal profit capital he has collected to date.
Congratulations Bernanke, you just succeeded in getting another legendary trader/investor out of the market with your central planning voodoo.
PSQR inception letter presented below.
And below are his even more bearish views as of his Annual Letter:
And here (via Alphaville), is PSQR's last monthly report.
h/t Lawrence Delevingne