The halo of invincibility surrounding the world's largest hedge fund/smallest mutual fund (because last we checked a hedge fund that is $37 billion in size has about the same turn radius as Vanguard), Paulson & Co., is starting to wear thin. According to the FT's Sam Jones, Paulson's flagship fund, the $9 billion Advantage Fund, dropped "close to 6 per cent in May, echoing losses across the industry." May’s loss means that in the year to date, the $9bn Paulson & Co Advantage Plus fund is down 7.6 per cent. The average hedge fund lost 1.39 per cent over the month according to preliminary data from Hedge Fund Research, with “event-driven” strategies such as that operated by Paulson & Co’s main fund down on average 0.62 per cent. Investors in the firm's other fund have little cause for cheer: "The Paulson & Co Gold fund dropped 6.39 per cent in May, erasing much of its 8.5 per cent April gain. The fund is up 0.9 per cent in the year. Paulson & Co is the world’s largest non-sovereign gold investor. Performance was better for the firm’s other funds. Its Credit fund was down 0.05 per cent for May, while the Recovery fund, which is geared to the prospects of the US economy, dropped 0.69 per cent. Paulson & Co declined to comment." Naturally, Paulson, who once upon a time saw Bank of America, soon to be embroiled in multi-billion dollar litigation to settle the fact that an unimaginable number of its mortgages are fraudulent through and through (thank you Agent Orange), would hit $30/share by the end of 2011 and soon will need a reverse stock split to get there, continues to be bullish: "In the firm’s most recent correspondence with investors Mr Paulson said difficulties for US banks had been a particular drag on his portfolios but that he remained optimistic...The US stock market could rally as much as 40 per cent from its first quarter level this year, he said." Sorry, John, not without QE 7 it won't.
And in the meantime, June is shaping up into another horrendous month for the once-star asset manager (or was that Paolo Pellegrini, we forget)- as we reported, Paulson has started June with a rookie $500 million loss in its Sino Forest investment: assuming the bulk of the position is allocated to the Advantage Fund, this means the the flagship fund is now down over 13% for the year.
If Paulson's LPs pull an SAC and start submitting redemption notices, in this market which already is near record margin debt, any liquidation will require indiscriminate selling of other positions to cover capital shortfall. And if bank repo desks start getting concerned about the viability of their collateral, we very well may be on the verge of another collateral-pull inspired, Lehman-type fiasco. In the meantime, our warnings that there is nothing quite as ludicrious as a $37 billion hedge fund (that 2% annual management fee could at least have purchased an analyst or two who is willing to perform due diligence on investments that are 14% of a company's outstanding shares) will hopefully finally be heard by someone.