After gaining instant fame with his massive subprime bet back in 2008/2009, John Paulson can’t seem to buy a clue in recent years leading to increasing concern among investors that he may be just a “one-trick pony”. Certainly returns in his Paulson Advantage fund would indicate some difficultly replicating historical success:
- 2011: -51%
- 2012: -19%
- 2013:+32
- 2014: -36%
- 2015: -3%
- 2016 YTD: -19%
For those keeping track, an investor who contributed $100,000 to the Paulson Advantage fund on 12/31/2010 would have just over $26,000 left today. Which is, of course, before removing Paulson’s annual fees: it’s hard work losing that much money, requires an army Harvard MBAs and those guys aren’t cheap.
As the Wall Street Journal pointed out earlier today, Paulson’s latest losses have come courtesy of a massive bet on the consolidation of large multi-national pharmaceutical businesses which he hedged with bearish bets on the broader markets. Unfortunately, exactly the opposite has happened so far in 2016 with the broader markets holding up while his largest pharma holdings have collapsed anywhere from 20% – 40%.
Mr. Paulson’s hedge-fund firm, Paulson & Co., is suffering painful losses this year, extending a period of uneven performance that has left the firm managing about $12 billion, down from $38 billion in 2011. Behind the recent difficulties: A big, faulty bet on pharmaceutical companies, as well as excessive caution about the broader market, according to people close to the matter.
Over the past two years, Mr. Paulson has argued to his investors that the pharmaceutical industry’s consolidation would accelerate, boosting growth prospects of specialty drug companies cutting deals. Six of Paulson & Co.’s 10 largest holdings as of June 30 were pharmaceutical companies, the most recent securities filings show, including the firm’s four largest positions. At one point in late 2014, Mr. Paulson told a client that one of Paulson’s major holdings, Valeant Pharmaceuticals Inc., would hit $250 a share. At the time, the stock was trading at around $140. To hedge, or protect, his drug investments, Paulson adopted bearish positions on the overall market, viewing stocks to be expensive.
The trades haven’t worked out. Health care is the worst performer among the 11 sectors in the S&P 500, with a drop of 6.1% so far this year. Paulson’s holdings have done worse. Shares of the firm’s largest investment, U.K. pharmaceutical company Shire PLC, are down 19% so far in 2016. The holding, worth about $864 million at current share prices, represented 9.1% of Paulson & Co.’s portfolio at the end of June, according to FactSet Research Systems Inc. The next three biggest Paulson investments, Mylan NV, Allergan PLC and Teva Pharmaceutical Industries, are down 37%, 40% and 40% this year, respectively. The three stocks represent $2.16 billion of investments for the firm at current prices. Meanwhile, the S&P 500 is up 2.2% this year, undercutting Paulson’s bearish position.
To be fair, it’s not just Paulson who’s had a terrible year: so has the majority of the hedge fund community, as confirmed by the record outflows from active managers, which as BofA forecast overnight, will be eclipsed by passive managers some time in 2023.
As the following table, breaking down the performance of select marquee hedge fund names, shows merely beating the S&P500 continues to remain an elusive goal for more than half of the increasingly incorrectly named “smart money.”
Courtesy of HSBC, here are the top 20 best and worst hedge funds through the last of October. Perhaps most notable, aside from the epic implosion of Odey discussed yesterday, is that the Tulip Trend Fund – a perennial number 1 – is barely in the Top 20.
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