John Paulson: Lucky or Great?

The hedge fund world can be a rough place, even if you are a billionaire. How tough are the markets? Well, the story of John Paulson shows just how fickle they can be, even for the top investors in the world. Prior to the sub-prime mortgage collapse, Paulson was a respected, albeit little known hedge fund manager plying his trade out of his Manhattan offices. A Harvard MBA and one of the top finance students during his undergrad days at NYU, but he wasn't a hedge fund superstar. That all changed when he made the bet of a lifetime against sub-prime mortgages. His trades were gutsy, to say the least. They hit big, and earned his hedge fund roughly $15 billion alone in 2007. The fund made another $5 billion in 2008 betting against banks and other financial firms. Paulson, who was a wealthy man with a net worth of around $100 million prior to the housing collapse, suddenly rocketed into the upper tier of the Forbes 400 -- an entirely different stratosphere of wealth. Many hailed John Paulson as a genius and among the greatest investors of our time, right up there with George Soros and Warren Buffett. While Paulson's bet may well have been "the greatest trade ever," as many describe it, the markets rarely let anyone ride a perpetual hot streak. Even Buffett, Soros and Paul Tudor Jones lose gobs of money from time to time. Heading into 2011, Paulson was about to learn this the hard way. Last year, his fund was decimated as big bets on banks (long positions this time) turned sour, causing his largest funds to hemorrhage money -- roughly a 40% haircut. Billions gone. His massive bet on a strong recovery in financials was just as gutsy as his subprime shorts, but the trade didn't pan out. So, it goes in the markets it seems. Right now, Paulson is riding another ridiculous trade which he has been building up for years. Nearly 44% of his fund is currently invested in gold and gold mining stocks. Readers can see exactly what he is holding here. While he obviously hasn't lost his bravado and appetite for risk, Paulson has been knocked down a notch or two as a result of his terrible 2011 performance. On Thursday, Bloomberg reported that Citigroup's private banking arm is yanking around $500 million in capital invested at Paulson & Co. Bloomberg also said that "Citigroup's private bank in May advised clients not to add money to the Paulson funds, a person familiar with the matter said at the time." This is typical. Money pours in when the manager is doing phenomenal, then it comes out when he stumbles. While Paulson may be down, he isn't out just yet. The question remains: is John Paulson just lucky or is he great? If you are a hedge fund investor and don't mind dropping a few million (or more) in paper money every once in awhile, stick with Paulson. He has proven he has the guts and conviction to bring in windfalls for his investors, even if Mr. Market has taught him a lesson or two in recent years.