Hedge Fund Manager John Paulson Struggles To Hold Onto Client Money
This story is part of an ongoing saga that I have posted about many times in the past. It has always amazed me how large supposedly sophisticated investors are so quick to commit capital to a hedge fund without significant statistical evidence of continued success. I have read so many stories of rising star managers and future investment gurus who produce stellar returns over a short period of time statistically, and then blow up spectacularly, to everyone's surprise. They go from no assets to billions under management and then lose a large majority of the money they raised through some debacle. John Paulson's claim to fame was based on his concentrated bet on shorting the sub-prime housing market through the use of credit default swaps. Instantly, based on this major trade, he catapulted to the title "investment legend". The problem with this type of investor mentality is that it doesn't take into consideration the fact that the returns may just have been due to a random favorable outcome rather than true skill! Yet, investors still plow into the hedge fund anyway. Clearly, this has been the case with Paulson. His returns have been horrendous and very irregular since the 2008 Financial Crisis. this is due to the fact that concentrated bets that go wrong can be disasterous as we have seen from the carnage that one single stock position in Valeant Pharmaceuticals created. Investors need to consider that a reasonably long evaluation period is necessary in order to truly assess whether a hedge fund manager's methodology truly generates alpha. Not only that, but also investors need to evaluate how the returns were generated, not just the returns themselves. If a manager consistently swings for the fences using concentrated positions without a risk management mechanism, you can rest assured that sometime in the future ,he will strike out big and maybe permanently! In my own management of client funds, my first concern is to actually calculate risk to equity and to ensure through a risk management algorithm ,that i avoid large catastrophic losses that become difficult ,if not impossible, to recover from.
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