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Hedge fund manager has Midas touch

Date: Friday, February 4, 2011
Author: Omaha.com

John A. Paulson made $4 billion betting against newfangled mortgage investments. But he made even more betting on an old-fashioned investment: gold.

Paulson, a hedge fund manager who sprang to fame when the housing market collapsed, personally made about $5 billion in 2010, according to two investors in his company.

How? Paulson bought gold — lots of it. His firm, Paulson & Co., owns securities that represent the rough equivalent of 96 metric tons of the metal.

It is an outsize wager by almost any standard. Paulson's firm does not actually own all that gold. But if it did, it would be sitting atop more gold than the Australian government. Paulson himself would be holding more gold than Bulgaria.

Paulson is known for betting big. His payday for last year exceeds the $4 billion he made for 2007.

He became one of the most celebrated hedge fund managers in the business after his firm shorted subprime investments.

The 2010 income was the culmination of a remarkable comeback for Paulson last year.

Paulson's firm oversees about $36 billion of assets in a range of hedge funds, but the bulk of his personal fortune is invested in his funds that buy securities linked to the price of gold. Gold jumped almost 30 percent in 2010, although it is down so far this year.

The $5 billion that Paulson earned was almost twice the entire payroll of all Major League Baseball teams.

Although part of that came from his firm's 20 percent cut of his funds' profits — a typical “performance fee” in the industry — the bulk of his gains came from his own money in his funds.

Investors say Paulson has about $10 billion of his own money invested in the funds, and the vast majority of his money is invested in a special gold share class he created a few years ago that is invested alongside his other portfolios.

So, while his Paulson Advantage fund was up 11.8 percent last year, the gold class shares of that portfolio surged 30.8 percent, according to investors in the fund, who spoke on the condition they not be named so as not to endanger their professional relationship with Paulson.

Paulson invested heavily in gold on the belief that the dollar would lose value in the coming years. His gold investments are primarily done via an exchange-traded fund, SPDR Gold Shares.

One of the largest ETFs in the world, SPDR Gold Shares is a trust that holds nearly 1,230 metric tons of gold bars in the vaults of HSBC bank in London.

The gold fund has attracted a lot of big investors who are looking for a hedge against inflation. George Soros and Eton Park's Eric Mindich both held substantial stakes in the gold shares trust, according to filings with the Securities and Exchange Commission.

“It's massively popular. It's been growing by leaps and bounds ever since the financial crisis,” said Scott Burns of research firm Morningstar.

Investors in the special gold shares class do not pay an additional management fee for their stake in the gold funds, but they do give Paulson 20 percent of any profits. Only about one-third of his total investors are in the gold shares class, many choosing instead to invest directly in the gold fund and keep all their gains.