John Paulson positioned his hedge fund to benefit from an economic recovery in 2011. For example, his Advantage fund was 80% long at the beginning of 2011. It was the wrong decision. Through August, his two largest funds are down 20%. September results are not in.
Even with his current underperformance, Morgan Stanley has raised $12 million for its Morgan Stanley HedgePremier/Paulson Advantage Fund II LP. The first fund was created in 2009. A client can invest only $150,000 to get access to Paulson's funds. A direct investment requires $10 million.
However, several investors are being advised to stay in the funds despite the poor performance. His return history is one reason. They believe he can rebound in the months ahead as in late 2010. Paulson's net asset value is deep under the watermark and cannot charge performance fees for a while. In a prior post, the Journal of Alternative Investments analyzed fund managers' behavior when their funds were more than 10% underwater. They decreased their portfolio's risk to preserve their capital base. Maybe the worst is behind Paulson & Company.
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