John Paulson, Winner in 2008 Crisis, Latest to Quit Hedge Funds

(Bloomberg) -- Just over a decade after John Paulson shot to fame and fortune, he's become the latest big-name money manager to quit the hedge-fund business, saying this week he's converting his firm into a family office.

Paulson never managed to sustain the success and notoriety he found by betting against the housing market in the run up to the last financial crisis. Now, in the midst of an another period of economic turmoil, he's returning outside investors' money to focus on his own fortune, which the Bloomberg Billionaires Index puts at $4.4 billion.

He joins a list of industry legends who have recently called it quits amid a generational shift. Louis Bacon said in the past year that he was stepping back, as returns that were once routinely in the double digits dribbled away. David Tepper also said he was transitioning his firm, though he planned to keep a few outside clients. Stan Druckenmiller and George Soros, two legends of the 1990s, were among the first to switch to the family office model.

Read more: Louis Bacon Steps Back to End Decades Running Client Money

The move also underscores the wider tumult in the investing world, where fund managers who for decades bestrode Wall Street as revered money makers find themselves struggling to compete with computer-driven, index-tracking funds that closely follow seemingly ever-rising markets at a fraction of the cost of traditional offerings.

“After considerable reflection and careful thought, Paulson & Co. will convert into a private investment office and return all external investor capital,” Paulson wrote in a letter to investors this week. A spokeswoman for the firm didn't immediately provide a comment.

Paulson started his firm in 1994 and built his fortune by betting against the U.S. housing market more than a decade ago. The firm's assets slumped from a peak of $38 billion in 2011 after investment losses and client defections: As of November 2018, it ran less than $9 billion -- and most of that was Paulson's own fortune.

Paulson's success was based largely on on his purchase of credit-default insurance against billions of dollars of subprime mortgages before the market collapsed in 2007. The move earned his firm $15 billion -- almost $4 billion for him personally -- and rocketed Paulson to the ranks of superstar managers.

Read more on John Paulson's hedge fund career

He grew up in New York City's Queens borough, and went on to attend New York University and then Harvard Business School, where he was a Baker Scholar, in the top 5% of his class. After briefly working at Boston Consulting Group and then with Odyssey Partners, he joined Bear Stearns as an investment banker in 1984. Four years later he left for investment firm Gruss & Co. and by 1994, he had enough money to go out on his own.

He started Paulson & Co. with $2 million of his own and family and friends' capital, and focused on risk arbitrage, betting on the shares of merging companies. The fund had grown to $300 million by 2003. At its peak, it was one of the largest hedge funds in the world.

In 2012, Paulson told Bloomberg Businessweek that he'd be “very happy” to see his firm continue after he retired, though that was something he said would still be years away. “I'm still relatively young, you know, being 56,” he said at the time.

But poor performance in the past few years had led him to reconsider. In 2018, the firm returned some investor cash, cut staff and planned to get back to basics by refocusing on merger arbitrage strategies -- the key to Paulson's earlier success.

Just a year later, Paulson said he was considering turning the firm into a family office or making it a hybrid business with one part managing his money and another running client capital. At the time, he said as much as 80% of the money his namesake firm ran was his, and that he'd likely make a decision within two years.

“Nowadays, it's difficult to assemble the kind of expertise in credit markets you had back in 2008 and 2009, especially because the ability to access those types of opportunities is harder today,” said Tim Ng, chief investment officer of Clearbrook Global Advisors who invested in Paulson in the late 1990s and early 2000s while at his previous firm. “And it's harder to convince investors you have the expertise to take advantage of those opportunities.”

Ever since his big win, Paulson stumbled from one losing trade to another, chipping away at the 2007 gains that are still among the largest in hedge-fund history. He wanted the next big trade, but was too optimistic about the U.S. economic recovery and overly bearish about the European debt crisis. He forecast that gold would strengthen as investors sought a hedge against inflation. Instead, the metal entered a bear market.

“It's like Wimbledon. When you win one year, you don't quit; you want to win again,” he told Gregory Zuckerman in his book “The Greatest Trade Ever.”

Paulson's first big misstep was in 2011 when one of his largest hedge funds lost 51% after wagers on a U.S. recovery went awry. It was one of the worst years of his career and resulted in clients yanking about $2 billion across his portfolios. Still, things soured even more over the next two years as he produced $9.4 billion in losses for clients.

Investors continued to pull money after the string of slip-ups, and the losses continued. After a series of wrong-way bets on drug stocks, he called 2016 “our most challenging year since inception,” in a report to investors.

Even with all of the ups and downs in his career, Paulson isn't ready to close the book on investing.

“With one chapter closing a new one is beginning for me and I look forward to continuing as an active participant in financial markets,” he wrote in the letter.

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