Paulson & Co. Said to Close Largest Funds to New Investments

Date: Tuesday, May 11, 2010
Author: Bloomberg

Billionaire John Paulson, whose Paulson & Co. oversees $35 billion in hedge funds, told clients he plans to close his largest funds to new investments.

The Advantage funds, which seek to profit from distressed debt, bankruptcies and mergers, manage about $20 billion. The only inflows the firm will allow in the funds will be to replace withdrawals, according to two clients who participated in an investor conference call today. Details on the closing will be announced in late June. Armel Leslie, a spokesman for the New York-based firm, declined to comment on the call.

Paulson is closing the fund to new investors after a record rally in credit markets. The S&P/LSTA US Leveraged Loan 100 Index gained 1.47 percent in April and this year’s 5.77 percent total return extended a record 52 percent rally in 2009.

Managers usually stop taking new cash when they are concerned that their funds are getting too big to run effectively. They give up the chance to manage more money and earn more fees, usually 2 percent of assets, to protect their ability to produce investment gains, of which they typically take a 20 percent cut.

Paulson’s Advantage Plus fund, the firm’s largest, climbed 6 percent this year through April.

V-Shaped Recovery

Paulson, 54, told investors he expects a V-shaped recovery in the U.S. and that household ownership is the most affordable it has been in 50 years, according to the clients, who asked not to be identified because the call was private. Paulson expects housing prices to rise this year and next.

He called European debt problems “manageable,” and said he expects to find attractive opportunities there as companies go through restructuring.

The stocks of companies emerging from bankruptcy are likely to be the biggest winners, he said. Paulson has invested $15 billion in more than 40 restructurings since 2008, the investors said.

Paulson also said French and German exporters are likely to benefit from a weakening euro, according to the clients.

The U.S. Securities and Exchange Commission sued Goldman Sachs Group Inc. for fraud on April 16, saying it failed to disclose that Paulson & Co. helped choose securities for a so- called synthetic collateralized debt obligation and then wagered that it would collapse. Goldman Sachs told clients the securities included in the deal were selected by ACA Management LLC, an independent third party, according to the regulator.

Paulson & Co. has not been accused of any wrongdoing and was not named in the suit. The SEC said that it didn’t sue the firm because it was Goldman Sachs’s job to disclose to investors how the CDO was constructed.

Hedge funds are loosely regulated private partnerships that can bet on rising or falling prices of any securities.