Paulson, Hayman Hedge Funds Increase; Goldman Fund Falls 16%

Date: Tuesday, August 7, 2007
Author: Jenny Strasburg and Katherine Burton, Bloomberg

Aug. 7 (Bloomberg) -- Paulson & Co., the New York-based hedge-fund manager whose assets more than doubled this year to $20 billion, is posting among the industry's highest returns by wagering that declines in subprime mortgages are far from over.

The Paulson Credit Opportunities Fund gained 303 percent this year as of July 31, according to investors. Dallas-based Hayman Capital Partners Subprime Credit Strategies Fund has done even better, climbing 305 percent.

``Hedge funds are well positioned to take advantage of the wide price disparities caused by volatility,'' said Mathieu Klein, chief executive officer of Paris-based investment adviser Darius Capital Partners. ``There are many opportunities created by this market.''

The Paulson and Hayman funds have trounced competitors, many of which got caught by the decline in debt markets. Goldman Sachs Group Inc.'s $9 billion Global Alpha hedge fund fell almost 12 percent in the two weeks ended Aug. 3, extending this year's drop to 16 percent.

Mortgages and corporate bonds fell as defaults by homeowners with the lowest credit ratings reached a 10-year high, and the difference in yield between U.S. Treasuries and the riskiest corporate debt increased by almost 2 percentage points since the beginning of June. The swings caused the collapse of two hedge funds managed by Bear Stearns Cos. in June. Sowood Capital Management LP, run by a former manager of Harvard University's endowment, is shutting down after a 60 percent loss last month.

Subprime Woes

Two other Paulson funds, one that invests in companies that are merging and another that buys and sells securities of companies going through changes such as mergers, spinoffs or bankruptcies, have returned 43 percent to 60 percent this year. Those funds also wagered that subprime mortgages will fall further. Founder John Paulson, 51, who was previously a managing director at New York-based Bear Stearns, declined to comment through a spokesman.

An index of credit-default swaps tied to 20 subprime mortgage bonds rated AAA and created in the second half of 2006 fell 1.8 percent to a new low of 88 on Aug. 3, according to index administrator Markit Group Ltd. The ABX-HE-AAA 07-1 index dropped more than 11 percent since June, suggesting a similar decline in the value of the bonds.

Kyle Bass, managing partner of Hayman, told investors in a letter sent last month that he expects mortgage defaults to increase. Hayman's Subprime Credit Strategies Fund climbed 107 percent in July.

`Feet First'

The flagship Hayman Capital Master Fund rose 60 percent in July and 149 percent for the year. It bet on falling subprime mortgage-backed securities and corporate credit. The fund also bought non-U.S. stocks and debt, and wagered that U.S. consumer- based equity, preferred shares and debt would tumble, according to the letter.

``There will be a `re-pricing' of risk on a global scale that will mean more credit funds being carried out the door feet first,'' Bass, 37, wrote in his letter. He declined to comment on the firm's performance.

Hedge funds are largely unregistered pools of capital that cater to wealthy individuals and institutions and allow managers to participate substantially in profits from investments. Their assets more than doubled to $1.7 trillion in the past five years.

Passport Global Master Fund, managed by John Burbank III, 43, climbed 36 percent in the month and has gained 101 percent for the year, investors said. Marcela Anongos, an investor relations contact for the $2.3 billion firm, declined to comment.

Goldman Alpha

The declines at Goldman's Global Alpha fund were caused by wrong-way bets on U.S. stocks and investment-grade debt, investors said. This year's loss in the fund, managed by Mark Carhart and Raymond Iwanowski, both 41, follows a 9 percent drop in 2006.

Global Alpha lost 8 percent during the last full week of July. The losses were magnified because the fund borrows money to make its trades. The fund finished the month down 9 percent, net of fees, investors said.

The fund had another 3 percent drop in the first three days of August as the Standard & Poor's 500 Index fell 1.5 percent and credit spreads widened.

Christopher Williams, a spokesman at New York-based Goldman, declined to comment on the fund's performance.

FUND/(MANAGER)                          JULY %  YEAR-TO-DATE %
Global Alpha                            -13.5    -16.0
 (Goldman Sachs Group Inc., New York)
Paulson merger arbitrage                 11.8     43.0
Paulson event arbitrage                  23.7     60.0
Paulson Credit Opportunities             76.0    303.0
Paulson Credit Opportunities II          56.0    150.0
 (Paulson & Co., New York)
Hayman Subprime Credit Strategies       107.0    305.1
Hayman flagship                          60.3    149.1
 (Hayman Capital Partners, Dallas)
Passport                                 35.8    100.7
(Passport Management LLC, San Francisco)

To contact the reporter on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net ; Katherine Burton in New York at kburton@bloomberg.net .