Whereas Paulson has been scrambling recently to put out PR flames now that it has been made clear that the hedge fund skimps on due diligence when it comes to Chinese fraudcaps (and who knows what else now that the ability to reverse engineer the creation of "made to explode" CDOs is taken away), and his latest attempt at mitigating investors is to use cost basis accounting to account for massive investment failures, the sad truth for investors is that just as Zero Hedge predicted, the firm just announced that its has lost $468 million on the Chinese investment in June and $574 million in 2011 (we are unclear if this is only for the Advantage Plus equity exposure or also for the fund's credit position in Sino as well). But not to worry, "net realized losses were C$105 million" claims Paulson. Too bad that fact is completely irrelevant when observing daily and YTD P&L (a loss of over 20% YTD), which Paulson knows all too well is the only metric that is relevant for a hedge fund (unless of course Paulson cares about his tax basis as well for investor pitches, and/or plans on becoming a private equity fund now that his stint as a mutual fund is over). Perhaps Paulson also needs a reminder that some other far more critical concepts to a hedge fund are the high water mark and terminal redemption requests. So what is next for up for Paulson's remaining LPs: maybe they can look forward to letters explaining how the fund's $450 million YTD loss in Bank of America (and we won't even touch Citigroup), is really an unrealized profit of $75 million since inception.
The WSJ reports on all the complexities associated with Paulson's decision to build his massive(ly wortheless) stake in the Chinese lumber company.
Mr. Paulson, in the letter, told investors that his firm had done ample due diligence on Sino-Forest, including reviews of public filings, participating in conference calls, and following up privately with management on specific questions. He noted that a member of his team went to China to visit Sino-Forest's operations.
He wrote that the investment first came to the firm's attention in January 2007, after news reports about investors considering making an offer for the company. Paulson & Co. began researching the company, and when Sino-Forest said publicly that it wouldn't have an offer, the stock fell—and the hedge-fund firm began building a position, the letter said. He wrote that the bet was based on the theory that the company could be acquired or that it could possibly be relisted from the Toronto Stock Exchange to a local exchange.
He also wrote that his firm decided to invest, in part, because the company reported "outstanding financial results" and "consistently traded at a significant discount to its global forest company peers."
The decision to sell, Mr. Paulson said, was based on the belief that Sino-Forest's stock may "remain depressed for an extended period of time, even if the investigation clears management." He said his team looked at another example where a company's stock never recovered from similar allegations.
We for one, can't wait for the excuses that will accompany Paulson's disposition of Bank of America shares sometime after the company has done its upcoming 1 for 10 reverse stock split and is back to trading at $10/share, after it is made all too clear that the Company's woefully inadequate litigation, put back and fraudclosure reserves will have needed a forward 100 for 1 dollar split.
Then again, the good thing to come from all of this is that should LPs truly pick up their redemption requests, and the unwind of the gold denominated share class be inevitable, the ability to buy paper and physical gold back in the $1200 range will be a reality.
And as a reminder, here is a pie chart distribution of Paulson's total equity holdings: