John Paulson, the billionaire money manager who’s vowed to restore his hedge fund to profitability after the worst year of his career, may have to take a cue from rival Ken Griffin.
Paulson’s $28 billion firm, Paulson & Co., will need to generate a 104 percent return to recoup a 51 percent drop in one of his largest hedge funds after wagers on a U.S. recovery went awry. Until he hits that mark, Paulson will have to forgo his 20 percent performance fee, and will collect only his 1.5 percent management fee. It has taken Griffin, the billionaire founder of Citadel LLC, three years to recover most of the 55 percent he lost for investors in 2008.
“With Paulson’s assets, size and longer-term investing style, it’s going to be difficult for him to make money back,” said Vidak Radonjic, managing partner at Beryl Consulting Group LLC in Jersey City, New Jersey, which advises clients on investing in hedge funds. “He has large, concentrated stock positions and the market isn’t really rewarding those with holdings like that.”
Hedge funds in 2011 posted their second-worst year in more than two decades. They’ve dropped about 7.7 percent from their peak asset value in April, according to Hedge Fund Research Inc. At the end of the third quarter, about 30 percent of the 2,000 funds that make up the firm’s benchmark index were below their so-called high watermark, or previous peak value. Like Paulson, most of those managers won’t be able to charge performance fees until they recoup losses.
Griffin, 43, needed to generate a return of about 122 percent to make some investors whole after his largest funds lost $9 billion on credit-market wagers in 2008. Those funds were about 2.5 percent short of a full recovery as of Dec. 31, after returning about 20 percent in 2011, 11 percent in 2010 and 62 percent the previous year as markets rallied, according to a person with knowledge of the returns who asked not to be identified because the information is private.
About 15 percent of clients’ capital has yet to reach the high watermark, the person said. Citadel, with $11.5 billion in assets, is among a handful of hedge funds that pass on all expenses to clients, rather than charging the industry-standard 2 percent annual management fee.
Paulson, 56, who made billions betting against the U.S. housing market in 2007, incurred losses last year on investments including Citigroup Inc. and Bank of America Corp. He told clients in November that he had reduced so-called net exposure in his main funds as well as wagers on rising securities across all his funds.
Armel Leslie, a spokesman for Paulson in New York, and Devon Spurgeon, a spokeswoman for Chicago-based Citadel, declined to comment on the returns.
Paulson returned 164 percent in his Advantage Plus fund in 2007, thanks to a wager that subprime mortgages would tumble. While investors who were in the fund that year have made money even with last year’s loss, those who came in later aren’t as lucky. Clients who invested at the beginning of 2008 are down about 3.5 percent since then.
“Clearly this has been an aberrational year for us,” Paulson wrote in a letter to investors dated Jan. 5. “Going forward we remain committed to restoring all of our funds to profitability.”
Paulson saw fourth-quarter redemptions of about $2 billion across all his portfolios. He and his employees account for about half of the firm’s capital, two people familiar with the matter said in October.
In his Jan. 5 letter, Paulson said that he would continue to keep all of his money in the fund other than what he needs to take out to pay taxes and personal expenditures.
Hedge funds lost 4.8 percent last year, according to Hedge Fund Research. The industry’s largest drawdown started in October 2007, when managers were down 21.4 percent from the industry’s peak asset value over the following 16 months, according to the research firm’s data. Funds took three years to return to their high watermark, the Chicago-based firm said.
Some managers had to shut their hedge funds after incurring steep losses. Nick Maounis, who ran Amaranth Advisors LLC, closed his firm after losing more than $6 billion, or 65 percent, in 2006. Jeffrey Gendell, who runs Tontine Associates LLC in Greenwich, Connecticut, shuttered his funds after losing almost 92 percent in 2008.