Money manager John Paulson has started buying beaten-up mortgage bonds as hedge funds stumbled for a fifth straight month.
Paulson, 52, is purchasing debt backed by home loans after generating six-fold returns last year with help from bets against sub-prime mortgages, investors in his funds said. Paulson’s Advantage Plus fund rose 29 per cent this year through October, while the Eurekahedge Hedge Fund Index, which tracks over 2,000 funds that invest globally, dropped about 12 per cent.
“Paulson’s timing is typically very good,” said Louis Gargour, chief investment officer of LNG Capital LLP, a London- based hedge fund that invests in distressed credit markets.
The $1.65 trillion hedge fund industry is enduring its worst period in at least eight years as global declines in stocks and commodity prices led to investment losses and customers withdrew a net $62.7 billion from the funds last month, Singapore-based Eurekahedge reported. Assets may fall to about $1 trillion by the middle of next year, analysts at New York-based Citigroup Inc., estimated in a report published earlier this week.
“Hedge funds will probably face more redemptions for a while,” said Akihiro Nishi, executive director at Tokyo-based Mitsubishi Asset Brains Co.’s investment advisory division.
The average hedge fund followed by Eurekahedge fell 4.5 per cent last month, compared with the 19 percent drop in the MSCI World Index and the 22 percent slump in the Reuters Jefferies CRB Index, a benchmark for commodities.
London-based JO Hambro Capital Management Ltd. plans to close one of its two hedge funds after a bet against Volkswagen AG backfired, said two people with knowledge of the decision. Citigroup is liquidating its corporate special opportunities fund after it plummetted 53 percent last month, the Financial Times reported earlier On Wednesday, citing unidentified people familiar with the matter.
About 350 hedge funds shut down in the first half of 2008, up 16 per cent from 303 a year earlier, according to data compiled by Chicago-based Hedge Fund Research Inc., Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested. They typically charge fees of 2 per cent of assets and 20 per cent of investment profits.
Paulson, whose New York-based Paulson & Co. oversees $36 billion in assets, said at a conference in June he sees “opportunities this year” to buy mortgage-backed debt. While he said it was “premature” to start buying, the indices that track the market have dropped 35 per cent since then.
Armel Leslie, a spokesman for Paulson’s firm, declined to comment on purchase of residential-mortgage securities.
