Although hindsight is always 20/20, one could be forgiven for questioning the wisdom of making concentrated bullish bets on both Puerto Rico and the Greek banking sector, but that’s exactly what John Paulson did and needless to say, the results haven’t been favorable.
As a matter of fact, Paulson’s bets on Puerto Rico and Greece mean the billionaire managed to get himself and his investors involved in two rather dubious "firsts": earlier this week, Puerto Rico became the first US commonwealth [17] in history to default, and last month, Greece became the first developed country to default to the IMF.
At this point, Bank of America has apparently seen enough because according to The New York Times [18], the bank’s wealth management arm is pulling clients’ money from one Paulson fund and putting another on "heightened review." Here’s more:
The wealth management arm of Bank of America Merrill Lynch is liquidating its clients’ money from one of Paulson & Company’s funds and has put another fund under “heightened review,” according to two people with knowledge of the hedge fund.
The bank told its financial advisers on Tuesday that it had submitted a full redemption request for client money in Paulson’s Advantage fund. The bank has also closed another Paulson fund, the Special Situations fund, to new client money and put it on “heightened review,” citing concerns “regarding significant concentration in illiquid investments, as well as heightened volatility and risk profile for the funds,” according to a document that was sent to advisers and seen by The New York Times.
Some of Mr. Paulson’s big bets this year have turned sour. He is one of a handful of bold hedge fund investors who poured hundreds of millions of dollars into Greece in a wager that the country’s economy would recover after years of economic crisis.
Mr. Paulson is also one of Puerto Rico’s biggest hedge fund investors, betting that the commonwealth will emerge from its own debt crisis. Many analysts say that prognosis looks increasingly tenuous after the commonwealth’s first bond default in its history this week.
Investors in the special situations fund have seen particularly wide swings, in part because of its exposure to Greece. The fund, which was set up in 2008 to make bets on a recovery in the United States and is now focused on Europe, has lost investors 3.8 percent this year as of the end of June. The fund is the second biggest shareholder after the government in Greece’s largest bank, Bank of Piraeus. It also bought a 10 percent equity stake in the Athens water monopoly, Athens Water Supply & Sewage, in 2014 for $137 million. At the time, the company had little debt and investors expected it to be privatized. Today, the utility is unable to collect payments on its bills.
That’s right, Paulson not only bought a double-digit stake in a Greek public utility, but also made large wagers on Bank of Piraeus which has, along with the rest of the sector, traded limit-down all three days this week as every eurocrat in Brussels scrambles to determine how many tens of billions in recap funds the sector will need.
"They have good management and we think the Greek economy is improving, which should benefit the banking sector," Paulson said [19] in 2013, adding that [20] Piraeus and Alpha Bank were "very well capitalised." As Bloomberg noted [21] back in June, Paulson "disclosed a 6.6 percent stake in [the bank] in the second quarter of 2014, and [although] that stake was valued at about 655 million euros on the date that the investment was disclosed ... the same stake [is now] worth just 162 million euros."
But even as investors demand their money back, Paulson can take solace in the fact that he is not alone. July was the worst month [22] for David Einhorn's Greenlight Capital since 2008, (apparently it doesn't pay to be bearish on momo names in today's market).
"The overall market environment has become acutely unfavorable for our investment strategy," Einhorn said.
We imagine that sentiment goes double for Paulson.
