Paulson touts merger, credit returns as gold bet turns sour

John Paulson gets back to his roots as an event driven investor and finds profits in mergers and restructurings in the first quarter while his big bet on gold as a hedge against inflation fails to win

Paulson's bet on gold goes south

Paulson & Co, the $18 billion hedge fund that has lost nearly half its assets since 2010, has made money investing in mergers and restructurings in the first quarter of this year, even as its investments in gold suffered whopping losses.
 
Speaking at the Salt Conference in Las Vegas, Paulson & Co founder John Paulson emphasised his roots as an event driven investor who seeks to profit from mergers, restructurings and other corporate catalysts, according to delegates who were present at the session, which was closed to media.
 
Paulson Partners, the merger arbitrage fund he started in 1994, has returned around 7% year-to-date (YTD), while the leveraged Paulson Partners Enhanced Fund is up around 15% for the year.
 
The funds have profited by taking aggressive positions in prospective takeover candidates before deals are publicly announced. Last year Paulson established large positions in US mobile carriers Sprint and Metro PCS after identifying the telecoms sector as a prime candidate for consolidation.
 
Paulson & Co was the largest shareholder in Metro PCS when it completed its merger with T-Mobile at the start of this month. It is the fourth-largest shareholder in Sprint, which is at the centre of a takeover tussle between SoftBank and Dish Network.
 
The merger funds pocketed a $300 million profit on the Sprint position, Paulson told delegates at Salt, while a separate bet on biotech company Life Technologies netted a profit of $400 million after it accepted a merger offer from Thermo Fisher Scientific.
 
Paulson’s credit funds, which represent the largest portion of the company’s assets, climbed around 12% in the first quarter as a result of a series of profitable event driven plays.
 
However, the gains have been overshadowed by a YTD loss of nearly 50% for Paulson’s Gold Fund, which invests in gold equities and derivatives.
 
Paulson started accumulating gold as a hedge against inflation and currency debasement as Western governments printed money at an unprecedented rate to revive their economies. The company created gold share classes for its existing funds in April 2009 and then launched the Gold Fund in early 2010.
 
However, inflation has remained muted because the growth in money supply has not resulted in credit expansion, with banks still reluctant to make loans and wage expectations remaining suppressed. Paulson attributed the fall in gold prices to selling by investors that have grown tired of holding the precious metal as a hedge against the receding threat of inflation.
 
Paulson told delegates the rate of credit expansion would have to increase for gold prices to recover.
 
He also played down the significance of the Gold Fund performance, telling delegates it accounts for less than 3% of Paulson & Co’s overall assets under management.