That may have been his mistake. By the end of 2008 Paulson’s hedge fund firm was managing $36 billion and it has become clear that managing all that money has been a very difficult thing for him to do. On Wall Street in recent years, the phrase “too big to manage” has been directed at big banks like Citigroup and, in the last year, even JPMorgan Chase & Co., but it may very well also apply to hedge funds.
Paulson’s hedge funds have performed very badly over the last two years. His Advantage Plus fund was down 52% in 2011 and his Advantage Fund was down 35%. His Credit Opportunities Fund was down 18% in 2011. One of Paulson’s big bets in 2011 was going long the shares of big banks like Bank of America, which turned out to be a bad move. Paulson sold out of his disastrous big positions in the big banks just as those shares started to rally and increase dramatically in 2012. His strategy was diverse and, at times, seemed all over the map. He was bullish on gold miners and was expecting a housing revival too early. He took an activist position in an insurance company. He lost money betting on a Chinese tree company trading in Toronto and on Hewlett-Packard.
This past year also turned out to be a huge disappointment for Paulson. His gold-related investments have been part of the problem. Paulson's Advantage Plus fund and Gold fund appear headed for drops of more than 20% in 2012. Like in 2011, there were small pockets of success. Paulson’s Real Estate Recovery Fund is posting gains greater than 20% in 2012.
Many of the hedge fund industry’s biggest stars these days have resisted getting bigger. David Tepper, founder of Appaloosa Management, manages $12 billion, and Charles “Chase” Coleman’s Tiger Global hedge fund, which he manages with Feroz Dewan, has about $8 billion. Both billionaires have been hitting it out of the park now for a long time and could be managing a lot more money—but they are staying relatively small by choice. Coleman’s Tiger Global even returned some money to its investors this year in order to stay smaller. Steve Cohen has not been taking in outside money for a while and most of the cash in his hedge fund belongs to him. Ray Dalio at Bridgewater has been able to perform at a very high level despite managing more than $100 billion, but Dalio is a true macro investor operating in very liquid markets.
Morgan Stanley Wealth Management is now telling its clients to redeem their cash from some of Paulson’s funds, following the lead of Citigroup’s private bank and even Manhattan’s 92nd Street Y. The dumb money always buys at the top and sells at the bottom. But Paulson is still managing some $19 billion. If an inability to manage a very large amount of money is really what is behind Paulson’s investment slump, getting out now might still be a shrewd move.
