Paulson earned billions betting against subprime mortgages as the founder of Paulson & Co., but many are not familiar with his unconventional route into the hedge fund world.
Paulson received his bachelor’s degree in finance from New York University’s College of Business and Public Administration, 1978, where he graduated first in his class, and a Master of Business Administration from Harvard Business School, where he was designated a Baker Scholar, the school’s top academic honor, for graduating in the top 5 percent. Paulson began his career at Boston Consulting Group before leaving to join Odyssey Partners, working under Leon Levy. He later worked in the mergers and acquisitions group at Bear Stearns. Prior to founding his own firm, he was a partner at mergers arbitrage firm Gruss Partners LP. In 1994, he founded his own hedge fund with $2 million and two employees (himself and an assistant).
As of Dec. 14th, his largest fund, Paulson’s Advantage Fund is making returns of 15%, based on bets on big banks and gold, must less than its returns in 2008. His first fund, Paulson Partners, made average returns of 16% per year, a very respectable return, but not enough to bring him the fame he has today.
Last year Paulson made bets against subprime mortgages, and his portfolio made 600%, while comparable hedge funds made 10%. Today, Paulson oversees almost $30 billion. Paulson & Co., Inc. had assets under management (as of June 1, 2007) of $12.5 billion (95% from institutions), which leapt to $36 billion as of November 2008. Under his direction, Paulson & Co. has capitalized on the problems in the foreclosure and mortgage backed securities (MBS) markets. In 2008 he decided to start a new fund that would capitalize on Wall Street’s capital problems by lending money to investment banks and other hedge funds currently feeling the pressure of the more than $345 billion of write downs resulting from under-performing assets linked to the housing market. In early 2008, the firm hired former Federal Reserve Chairman Alan Greenspan.
In September 2008, Paulson has bet against four of the five biggest British banks. His positions included a £350m bet against shares in Barclays; £292m against Royal Bank of Scotland; and £260m against Lloyds TSB. He eventually booked a profit of as much as £280m after reducing its short position in RBS in January 2009. On August 12, 2009, Paulson purchased 2 million shares of Goldman Sachs as well as 35 million shares in Regions Financial.
In November Paulson doubled his stake in Kraft, a consumer foods giant that is making a hostile takeover attempt with Cadbury. He is also trying to gain control of Idearc, the U.S. telephone book publisher that filed bankruptcy in the Spring.
Paulson has taken very large positions in Bank of America and Citigroup. Paulson purchased shares in Bank of America expecting the stock to double by 2011. At the same time he has sold his position in Goldman Sachs. Paulson’s play on gold is based on the fact that the precious mineral will continue to be purchased by emerging central banks as the value of the dollar depreciates.