Tags: Paulson | Hedge | Fund | Investors

Paulson Braces Hedge Fund Investors for the Worst

Wednesday, 12 Oct 2011 07:59 AM


John Paulson could face a two-pronged problem in the coming weeks as outside investors and possibly even some of his own employees walk in the wake of the hedge fund firm's worst-ever returns.

The firm told investors on Tuesday that as much as a quarter of its assets could depart in a "worst-case" scenario if all people who are eligible cash out by the end of the year.

Paulson's team hosted a call to go over last month's results only a few days after he notified investors that one of Paulson & Co.'s biggest funds is down 47 percent for the year.

Many of Paulson's funds have lost big this year, as the well-known money manager bet wrong that the U.S. economy would revive sooner rather than later.

However, in the days leading up to the investor call, some on Paulson's team had been telling brokers and others on Wall Street that at least 20 percent of the $30 billion in assets the fund manages could be redeemed. The deadline to get out of the biggest funds — the Advantage funds — is coming up on October 31.

Outsiders have long said Paulson is in no danger of collapsing because about 40 percent of the assets are owned by the billionaire stock picker and his dozen or so most trusted lieutenants.

But some analysts working in the $2 trillion hedge fund industry said with Paulson's funds slumping so badly, some of his top employees could look to leave at year's end and cash-in their chips.

Some of Paulson's employees — whose money has been locked up for years — will receive the final installment of their bonus for 2008 this year, say people familiar with the hedge fund.

For some time Paulson had structured bonuses to vest over a four-year period. That practice has been scrapped this year so that bonuses for 2011 — a year where Paulson's flagship Advantage Fund is off 32 percent and its Advantage Plus cousin is down 47 percent — would be paid immediately.

Consultants who track personnel movements in the hedge fund industry believe that there will not be a mass exodus from Paulson. The man who earned $5 billion personally last year will still be able to pay his roughly 120 employees very well considering the management fees he will earn on $30 billion in assets.

One recruiter in the industry said he has not yet received any resumes from Paulson employees.

"He has huge management fees and his team will likely still be compensated very well so I think they will stick it out — everyone can have a bad year," said the person who asked not to be named because he is fielding calls from many hedge fund firm employees.

One critical point is that industry consultants and bankers on Wall Street are fairly sure Paulson will not be able to attract new money now even though he promised not to charge performance fees on new money.

© 2015 Thomson/Reuters. All rights reserved.

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