John Paulson, the billionaire hedge-fund manager seeking to reverse record losses in 2011, told investors he is shorting European sovereign bonds, according to a person familiar with the matter.
Paulson, 56, said during a call with investors that he is also buying credit-default swaps on European debt, or protection against the chance of default, said the person, who asked not to be identified because the information is private. Spanish banks are of particular concern as their holdings of the country’s debt and client withdrawals make them overly dependent on European Central Bank financing, Paulson told investors.
Paulson, who manages about $24 billion in his New York-based firm Paulson & Co., lost 51 percent in one of his largest hedge funds last year after making an ill-timed bet on a U.S. economic recovery. In February, he said that the euro is “structurally flawed,” and will eventually fall apart, according to a letter sent to investors.
Concerns that Spain’s position will deteriorate amid the sovereign-debt crisis in Europe have spurred a surge in the nation’s borrowing costs this year. Credit-default swaps insuring Spanish government debt rose yesterday to a record in London, according to CMA, a market information firm in London, signaling deterioration in investor perceptions of credit quality. Yields on the country’s 10-year bonds climbed to the highest level since Dec. 1 earlier yesterday.
Spanish banks’ borrowings from the ECB jumped by almost 50 percent in March, reaching the most on record, as lenders tap emergency loans and channel some of it into sovereign debt purchases, according to data from the Bank of Spain.
Paulson became a billionaire in 2007 by betting against the U.S. subprime mortgage market. Armel Leslie, a spokesman for Paulson & Co., declined to comment on the hedge-fund manager’s call with investors.
Paulson told investors the firm formed risk oversight and portfolio review committees during the first quarter. The committees meet weekly in order to review the hedge fund’s individual positions, the firm’s financing, regulatory matters and other topics, the person said.
At a recent meeting, one of the groups discussed the firm’s investments in gold equities, which contributed to losses this year through March for Paulson’s Gold Fund and Advantage funds. The committee concluded that the firm’s weighting in stocks tied to the metal should remain unchanged because they are historically inexpensive, although there may be alterations to the size of individual positions, the person said.
Paulson said he took a portion of his own money out of the $6.8 billion Credit Opportunities Fund and put it into the $1.2 billion Gold Fund, which can buy derivatives and other gold-related investments, and the $8.3 billion Advantage funds, which seek to profit from corporate events such as takeovers and bankruptcies, according to the person and a year-end letter that the firm sent to investors.