Hedge Funds Said to Post Profit from Paulsons Abandoned Plan

Date: Tuesday, December 9, 2008
Author: Dealbook.Blogs.NYTimes.com

Should Treasury Secretary Henry M. Paulson have stuck with his original blueprint to bail out struggling U.S. banks?

That’s the suggestion by the New York Post, which reported that two hedge fund managers who followed Mr. Paulson’s initial playbook and snapped up distressed mortgage assets, are now posting solid returns, whereas Mr. Paulson’s decision to make direct cash investments is producing mixed results.

“Our returns exceed 40 percent this year as a result of identifying the cheapest sectors of the mortgage market as well as taking advantage of the chance to buy undervalued [mortgage-backed securities],” The Post cited Russ Jeffrey, the manager of Providence Capital’s Master ABS Fund, as writing in a letter to investors this past week.

While The Post notes that the large return dates to earlier this year, it says that since Oct. 30, soon after Mr. Paulson first announced his original TARP strategy, Mr. Jeffrey is up about 3.1 percent.

The Post also cites Scott Minerd, a partner of hedge fund Guggenheim Asset Management, as making a profit from that same strategy.

Meanwhile, the newspaper said, Mr. Paulson is seeing one piece of his investment plan float 31 percent underwater.

Under Mr. Paulson’s revised plan, the government has injected cash directly into banks in return for preferred shares and warrants to buy common shares. The warrants, which last for 10 years, are currently 31 percent under water for the 10 largest banks, according to The Post’s calculations.