Magazine article The Spectator

The Men Who Called the Markets Right

Magazine article The Spectator

The Men Who Called the Markets Right

Article excerpt

It has been a terrible 12 months for investors. It didn't make much difference whether you invested in stocks, commodities or corporate bonds, the chances were you took a hammering. Even gold failed to sparkle as the credit crunch cut a swath through every kind of asset class.

And yet there were a few individuals who managed to make fortunes as the markets tumbled. In the US, John Paulson cleaned up by betting big against the subprime mortgage market. Over here, amid the general gloom along Mayfair's Hedge Fund Alley, there were a couple of money managers who could still afford somewhere better than Pret a Manger for lunch. BlueGold rode commodity markets to perfection, making money on the way up and on the way down again.

Mulvaney Capital fired up its computerised trading system to double its investors' money during 2008.

In any market that's moving violently, there will always be people who are making money while others are losing it. There are two parties to every trade, after all. But the tiny handful who called this market right are interesting for two reasons. They tell us something about the kind of investments that triumph in extreme conditions. And they are likely to be the gurus for the next decade.

Hedge fund managers such as George Soros and Jim Rogers are still listened to because of the huge sums they made in the recession of the early 1990s. An earlier generation followed every word from Jim Slater, a share investor who made a pile in the early 1970s.

In years to come, it is the likes of Paulson whose words will move markets. Whatever markets are doing, there are profits to be made if you can get yourself on the right side of the trade. No one did that better than John Paulson. No relation of Hank, George Bush's ill-fated treasury secretary, Paulson has already acquired rock-star status in the hedge fund world.

After graduating in the top 5 per cent of his year at Harvard Business School, Paulson worked in private equity, then at Bear Stearns, before starting his own fund in 1994.

By 2006, he already had $36 billion under management. Then he figured out that US house prices were going up too far, too fast, and were poised for a nasty correction: they were at least 30 per cent above their longterm value. 'But you can't short houses, ' as he would later explain.

Indeed you can't. What you could do, however, was trade complex instruments called credit-swap derivatives, which insured against the risk of default on the tens of billion dollars worth of mortgages which were being traded on Wall Street. In 2006, he opened his Credit Opportunities Fund to play that market. Its strategy of betting against the boom made 70 per cent in the first quarter of 2007 alone. Over the course of that year, the fund multiplied its value six-fold. Paulson's profits were more than $15 billion, on which he collected the standard hedge fund performance fee of 20 per cent; his firm's share of the profits came out at more than $3 billion.

He's still on a roll. Last year, John Paulson was shorting British bank shares: a trade against the Royal Bank of Scotland netted his fund close on £300 million. Overall, his main fund was up another 37 per cent in 2008. If anyone is the new Soros, it is John Paulson. The markets now track his every word. So what are his tips? Paulson thinks 2009 will be another tough year for the global economy and he's still short of equities -- but he has started buying up the debt of companies in trouble. …

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