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Ten to Watch 2010-2011: Lucky Or Smart?

Ten to Watch 2010-2011: Lucky Or Smart?

John Paulson, Founder and President, Paulson & Co.

John Paulson

AGE: 55

POSITION: Founder and President, Paulson & Co.


EDUCATION: B.A., Finance, New York University; M.B.A., Harvard University.

John Paulson, the famed hedge fund manager who made a $20 billion dollars off of his subprime short, is either a cheat or a genius. Yes, his firm was named in the Goldman Sachs fraud case for his undisclosed role in helping create synthetic CDOs. But, if you saw or read his analysis of the housing market that he gave before Congress, it was clear that he knew what he was talking about.

“He is an experienced arbitrager, shrewd and insightful,” says one hedge fund professional who creates funds of hedge funds for institutions and retail investors. “The market presented him with one of the trading opportunities of all time. And he was experienced enough and determined enough to make it happen.” The hedge fund expert adds, “In retrospect, people say, ‘Oh, gee, I could have done that, I could have invented the Apple computer.’ But that's in retrospect. He saw the trade early on. He is insightful and creative.”

Will that insight and creativity continue to pay off now that he has a far larger asset base (around $30 to 39 billion)? It's worth noting that Paulson has changed his opinion. He is bullish on the U.S. economy (but bearish on the dollar) and long gold, for example. (Paulson & Co. is SPDR Gold Shares' largest holder.) He's bullish on real estate and thinks the time to buy a house is right now, he told a crowd last month at the London School of Economics. He also says 1970s-style inflation could be just three to five years off.

In short, the former arbitrager is now making directional, macro bets. (He still runs — and has most of his money in — his Advantage funds, which invest in special situations, such as corporate mergers.) Those are different skills than the type of arbitrage bets he made his name on.

And 2010 has already been less kind to Paulson than, say, 2007, in which he made around $4 billion. He has suffered $2 billion in redemptions at the end of June; there is a whiff of uncertainty surrounding him in the Goldman Sachs synthetic CDO fraud case (which Goldman just settled for $550 million dollars), and his Recovery fund took a 12 percent haircut in June; the Advantage Plus fund also took a nearly 7 percent hit. Investors and Wall Streeters alike will be asking: Was he just lucky in making the “greatest trade ever?” We're going to guess Paulson isn't washed up.

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