財經觀察 2294:Too-Big-to-Succeed

Paulson's $32 Billion-and-Growing Funds Prompt Too-Big-to-Succeed Concerns

---
Sent From Bloomberg Mobile MSG

+------------------------------------------------------------------------------+

Paulson’s $32 Billion Funds Prompt Too-Big Concerns (Update1)
2010-03-29 15:43:17.267 GMT

    (Adds Paulson’s use of borrowed money in 20th paragraph.)

By Katherine Burton
    March 29 (Bloomberg) -- John Paulson started the year
overseeing $32 billion in hedge funds, third in the world behind
JPMorgan Chase & Co. and Bridgewater Associates LP. Unlike many
of his biggest rivals, he’s taking in new cash, raising the
question of how much money is too much for a hedge-fund manager.
    “There’s no doubt that Paulson is a big draw for investors
at the moment,” said Richard Tomlinson, founder of London-based
Tomlinson Investment Consulting, which advises clients on hedge
funds. “As with all managers that bulk up, there’s always the
risk of returns becoming mediocre.”
    Paulson & Co., the New York-based firm that the former Bear
Stearns banker and Gruss Partners trader started in 1994,
differs from many large competitors because it makes
concentrated bets, such as the wager against subprime mortgages
that helped generate $3 billion of profit in 2007. As assets
increase, it can get harder for a fund to find investments big
enough to drive returns and to trade without distorting prices.
    Paulson’s main $19 billion Advantage funds, which primarily
seek to profit on distressed debt, bankruptcies and mergers,
have lagged behind peers this year and last after beating them
in 2007 and 2008. Armel Leslie, a spokesman for Paulson,
declined to comment.

                       Lessons of Tiger

    The world’s largest hedge funds are approaching their
previous peak assets after recovering from their worst-ever
losses and investor outflows in 2008. They are benefiting from a
shift by pension funds and endowments to established firms with
steady returns and staff dedicated to risk management.
    Fourteen firms managed $20 billion or more in hedge funds
at the start of 2010, when industry assets stood at $1.6
trillion. Hedge funds oversaw a record $1.9 trillion in mid-
2008.
    In 1998, only George Soros’s Soros Fund Management LLC and
Julian Robertson’s Tiger Management LLC exceeded the $20 billion
mark. Within two years of hitting that milestone, both firms had
suffered big losses and decided to stop managing money for other
investors.
    “There is a point where you can be too big to generate
returns,” said Lawrence P. Chiarello, a partner at Red Bank,
New Jersey-based SkyView Investment Advisors LLC, which selects
hedge funds for clients. “Being large and able to build a
strong infrastructure are good things, but in general I think
the pendulum has swung too far.”
    The size at which a fund may become too big depends on
factors such as its investment strategy and the markets in which
it trades, Chiarello said.

                       Citadel’s Stumble

    The industry is replete with examples of managers losing
billions after they took increasingly bigger bets to produce top
returns. Robertson’s fund was brought down in part by a 25
percent stake in US Airways Group Inc. and $2 billion of losses
when the U.S. dollar fell against the Japanese yen.
    In 2008, Chicago-based Citadel Investment Group LLC, whose
assets had climbed to about $20 billion, lost 55 percent in its
biggest funds after wagers on convertible, high-yield and
investment-grade bonds hedged with credit-default swaps all went
awry. It managed about $12 billion at Dec. 31.
    Hany Shawky, a finance professor at the University of
Albany-State University of New York, wrote a paper in 2008 that
found that smaller funds outperform larger funds on an absolute
basis. On a risk-adjusted basis, which takes into account the
swings in returns, large funds were better. Shawky is working on
an update to his study, which he said has found similar results.

                         Smaller Bets

    While New York-based JPMorgan and Bridgewater of Westport,
Connecticut, are larger than Paulson’s firm, they tend to make
comparatively smaller bets.
    JPMorgan manages about $33 billion in more than 50 funds in
markets around the globe. The bank’s wholly owned Highbridge
Capital Management LLC subsidiary manages an additional $11
billion in four funds.
    Bridgewater manages its $43.6 billion in one strategy it
calls Pure Alpha. The firm takes many small positions using
futures to bet on stock indexes, bonds, currencies and
commodities. Those markets are liquid, meaning that traders can
get in and out of positions without moving prices dramatically.
    Paulson tends to invest a lot in trends he has identified.
    In 2007, before the housing market collapsed, he spent $2
billion buying credit-default swaps on subprime mortgages, a
trade that soared when home loans went bad in record numbers.
Today he has 10 percent to 15 percent of his Advantage funds in
the shares of gold-mining companies on the expectation that
prices of the metal will rise along with inflation.

                         Housing Score

    The subprime wager paid off. The Advantage Plus fund, which
uses leverage to amplify returns, jumped 160 percent in 2007 and
37 percent in 2008. Comparable funds gained an average of 6.6
percent in 2007 and fell 22 percent in 2008, according to
Chicago-based Hedge Fund Research Inc. The firm’s Credit
Opportunities funds, which held the biggest chunk of Paulson’s
subprime trade, were up 600 percent in 2007.
    Paulson’s performance was more pedestrian in 2009. The
Advantage Plus fund climbed 21 percent, compared with about 25
percent for peers. Through February 2010, it lost 1 percent,
compared with a gain of 1 percent for similar funds.
    Even as performance trailed peers last year, the Advantage
funds increased the amount of borrowed money they used. In June,
the funds had borrowed 34 cents for every dollar of net assets,
according to a presentation Paulson made at a Merrill Lynch &
Co. investor conference in February. The level climbed to 50
cents for every dollar by December.
    Some Paulson investors say they aren’t concerned that he’s
gotten too big.

                         Bigger Not Bad

    “For funds that invest in a number of strategies, size
isn’t an issue,” said Brad Alford, head of Atlanta-based Alpha
Capital Management LLC, which picks hedge funds for clients and
is a Paulson investor. “Bigger funds produce more in revenue,
so they can hire the best talent and build the most robust
infrastructure.”
    Paulson, 54, started his hedge-fund career 16 years ago
with a fund that focused on merger arbitrage. In 2004, when he
was managing $3 billion, he began expanding, adding the first
Advantage fund. He opened his first credit fund in 2006. At the
end of 2008, he started the Recovery Fund, now $1.7 billion, to
bet on companies like Citigroup Inc., Conseco Inc. and Bank of
America Corp. as they rebounded from the financial-services
meltdown.
    This year he launched a $350 million gold fund and a real
estate fund that is buying property at distressed prices.
    At the Merrill Lynch investor conference, Paulson defended
the size of his firm as he closes in on the $36 billion in
assets he reached in 2008.

                      Marketing Continues

    “Paulson funds tiny relative to market opportunities,”
was the title of one slide. It compared the $6.9 billion Credit
funds to the markets for distressed mortgages, high-yield bonds
and leveraged loans, saying each are more than $1 trillion.
    Paulson continues to market his funds because he sees
opportunities in the next 18 months to 24 months as companies
restructure their debt, said Charles Krusen, head of New York-
based Krusen Capital Management LLC and a Paulson investor.
    The unleveraged version of the Advantage fund is targeting
returns of 12 percent to 15 percent, he said.
    “We think they’ll be able to do that,” said Krusen,
adding that Paulson has closed his credit and merger-arbitrage
funds before when he was concerned their size might hinder
performance.
    Brevan Howard Asset Management LLP, Europe’s largest hedge-
fund firm, closed its $2 billion Asia Fund and $2.5 billion
Emerging Market Strategies Fund to new investors last November,
and is limiting inflows into its $21.3 billion Brevan Howard
Master Fund Ltd.

                         Tudor, Shumway

    Paul Jones’s Tudor Investment Corp. has stopped taking
money into its $9.5 billion BVI Global Fund Ltd. Jones also
returned some of 2009 profits in the Greenwich, Connecticut-
based fund to clients this year as another way to cap assets.
    Chris Shumway, who runs Greenwich, Connecticut-based
Shumway Capital Partners LLC, a stock hedge fund, isn’t
accepting more money after reaching $8 billion. New York-based
King Street Capital Management LP, a credit fund, told investors
it would “moderate” growth now that it has more than $20
billion, according to a letter sent to investors.
    “Three of our core managers have closed to new
investments,” said Stewart Massey, who runs Massey Quick & Co.,
a consulting firm in Morristown, New Jersey, that caters to
wealthy individuals, endowments and foundations. “We love to
see that. What they are saying is, ‘I’m running this for
performance, not scale.’ ”

*T
Hedge-Fund Firms With $20 Billion or More in Assets
(Jan. 1, 2010)

JPMorgan Chase & Co.                    $44 billion
    JPMorgan Asset Management            $33 billion
    Highbridge Capital Management        $11 billion

Bridgewater Associates                  $43.6 billion
Paulson & Co.                           $32 billion
Soros Fund Management                   $27 billion
Brevan Howard Asset Management          $27 billion
Man Group                               $25.3 billion
D.E. Shaw                               $23.6 billion
Och-Ziff Capital Management             $23.5 billion
Baupost Group                           $21.8 billion
Angelo, Gordon & Co.                    $20.8 billion
Goldman Sachs Asset Management          $20.8 billion
Farallon Capital Management             $20.7 billion
Avenue Capital Group                    $20 billion
King Street Capital Management*         $20 billion

*As of Feb. 28, 2010.
Source: AR magazine, Pensions & Investments magazine and
Bloomberg data.