Paulson’s Advantage Fund Falls 36% In 2014
Billionaire John Paulson posted the second-worst trading year of his career in 2014 as a wrong-way energy bet added to declines tied to a failed merger and investments in Fannie Mae and Freddie Mac.
The worst performance was in the Advantage Plus fund, which plummeted 36% last year, two people with knowledge of the returns said. The event-driven strategy, which uses leverage to make bets on companies undergoing transformations such as spinoffs and bankruptcies, lost 3.1% in December, said the people, who asked not to be identified because the information is private. The 59-year-old manager also lost money in a credit pool, special situations fund, and barely broke even in a fund that bets on company mergers.
Paulson & Co.’s performance placed it near the bottom of the hedge fund pack last year as the industry returned a meager 1.4%. The manager, who shot to fame after making $15 billion on the housing crisis in 2007, has struggled to regain its footing since 2011, when bets on the U.S. recovery went awry, losing money in all of its main strategies—including a 51% tumble in the Advantage Plus fund. Paulson also lost money in investments tied to gold and Europe’s economy, causing assets to dwindle to $19 billion, half the peak in 2011.
He told investors that 2011 was “an aberrational year” and the firm was committed to restoring the funds to profitability. Paulson was among the best-performing managers two years later.
Armel Leslie, a spokesman for New York-based Paulson & Co. with Peppercomm, declined to comment on the returns.
Paulson lost money this year betting on the preferred shares of Fannie Mae and Freddie Mac, which tumbled in October after a judge ruled that the bailed-out companies didn’t have to share profits with private stockholders. He also stumbled on energy-related securities after amassing the largest stake in Whiting Petroleum Corp. The Denver-based exploration and production firm fell 64% from a peak in August.
The Advantage fund, which employs a similar strategy without leverage, slumped 2.4% in December and 29% in 2014, the people said.
Unrestricted shares of the Advantage and Advantage Plus funds, which can buy newly issued securities and were invested in Alibaba Group Holding Ltd., fell 19% and 24% respectively last year, one of the people said. The event funds had $2.8 billion in assets as of December 1.
Investors in the Advantage fund have lost 48% since the end of 2010, while clients in Advantage Plus are down more than 66%.
Undergoing Mergers
The firm’s Paulson Partners fund, which invests in companies undergoing mergers, ended the year up 0.8% after falling 0.3% in December, one of the people said. The merger-arbitrage funds, which comprise about half of firmwide assets, were hurt by Shire Plc plummeting in October after agreeing to terminate a merger with AbbVie Inc. Paulson Partners Enhanced, a version of the fund that employs leverage to amplify returns, fell 1.6% in 2014 after declining 0.7% in December.
Paulson started the firm in 1994 with the merger fund, and the strategy has been his most successful of late. Over the past four years, the Partners fund has returned 18% and the enhanced version has climbed 23%. Other hedge funds that invest in merging companies returned 11% in the same period, according to data compiled by Hedge Fund Research Inc.
—Bloomberg News
Private Equity, Real Estate A Hit With HNW Investors
Investments in private equity and real estate gained ground in 2014 with members of Tiger 21, an investment club for the ultra-wealthy.
Public equities are still the favored investment vehicle, but it declined in preference. Thirty-five percent of Tiger 21 members favor public equities this year compared to 41% in 2013, according to a survey by the investment club.
Private equity gained 2% to come in as the favorite for 19% of the members and real estate gained 1% to come in third place at 16%, the survey says.
For the first time, the survey asked members how their private equity allocations break down. Sixty-three percent of private equity investment is allocated to direct investments in members’ own companies, another 17% went to private companies that are not their own, and the remaining 20% goes to funds.
“Private equity continues to be a growing focus for our members and for good reason. Members feel that investing in private equity is something they understand because so many members created their wealth in private companies,” says Michael Sonnenfeldt, founder and chairman of Tiger 21.
Tiger 21 has 290 members who manage $30 billion in wealth.
“Also, members like the superior access to information in private companies, so they are often among the first to learn about problems so they can pitch in and help solve them,” he adds.
For real estate, residential real estate investments are the favored vehicle, over commercial.
The most common public equity investment is individual stocks at 43%, a 7 percentage point decrease from 2013 and a full 14 points below 2012. ETFs, at 25%, gained four percentage points from last year, followed by mutual funds/long-only funds at 17% and hedge funds at 14%.
The most popular equity sectors, according to respondents, are financials, followed by consumer discretionary and energy, technology and health care.
“Our members are long-term investors,” says Sonnenfeldt. “In the case of Apple and Berkshire Hathaway, regardless of which stock comes in on top, their consistent presence on our list shows that our members have a fundamental belief in those companies for the long term.”
—Karen DeMasters
Alfa Romeo Invades BMW, Audi Luxury Market
Alfa Romeo is finalizing the development of its first crossover, following a new sedan, as the revival of the sporty brand takes shape.
The compact sport-utility vehicle will be built at the Cassino plant near Rome, Fiat Chrysler Automobiles NV Chief Executive Officer Sergio Marchionne told reporters at the Detroit auto show in January. A new mid-sized sedan is slated to premiere this year as the company starts to fulfill its promise to expand Alfa Romeo.
The two models will both be based on rear-wheel-drive technology dubbed “Giorgio,” which has been developed by an engineering team led by former Ferrari managers, said people familiar with the matter, who asked not to be identified because the plans are private. The SUV will likely be introduced in 2016, the people said.
The two cars are critical to Marchionne’s strategy to transform Alfa Romeo from a niche Italian manufacturer into a luxury brand capable of challenging BMW AG and Volkswagen AG’s Audi. Fiat Chrysler plans to spend 5 billion euros ($6 billion) on Alfa Romeo’s overhaul to tap into the cachet that lingers from cars like the Duetto Spider driven by Dustin Hoffman in the film “The Graduate.”
With a plan to roll out eight new models by 2018, including two SUVs, the brand is seeking to increase sales more than fivefold to 400,000 cars. The expansion will come mainly from China and North America. As part of its return to the U.S. market, Alfa Romeo presented the open-top spider version of the $53,900 4C sports car at the Detroit show. U.S. dealers say demand is strong.
Sales Target
“We’re delivering Alfas as fast as we can get them,” said Chuck Eddy, a Fiat Chrysler dealer near Youngstown, Ohio. “We’re excited. We’re looking to build a new facility, and we wouldn’t do that if we didn’t feel positive about the brand.”
Alfa Romeo’s expansion is part of Marchionne’s plan to boost Fiat Chrysler’s sales to 7 million cars in 2018. Marchionne said that the manufacturer is in line to meet its 2014 profit targets and will sell more than 5 million cars this year. By comparison, Volkswagen AG, the world’s second-largest automaker, sold 10.14 million vehicles in 2014.
Still, Alfa Romeo may only reach half its target. IHS Automotive forecasts 2018 deliveries of about 200,000 cars versus fewer than 70,000 last year.
The goal’s “pretty ambitious,” said Michelle Krebs, a senior analyst at Autotrader.com. With U.S. sales growth plateauing, “the pie isn’t growing, so they’ll have to take that share from somewhere. But where?”
Alfa Romeo’s revival is critical to London-based Fiat Chrysler’s upscale strategy, which calls for vehicles to be made in the company’s under-used Italian factories for sale worldwide. Operations in Italy contributed to 141 million euros in European losses at FCA in the first nine months of 2014.
Marchionne’s turnaround plan is showing signs of gaining traction. The company said today that it will hire more than 1,000 workers at a factory in Melfi as well as temporarily transfer 350 employees there from other plants. That’s in addition to bringing back the 5,418 people who have been on furlough at the southern Italian site. The factory makes the Fiat 500X crossover and the Jeep Renegade compact SUV.
“There’s room in the U.S. consumer’s mind for another luxury brand, if done well,” said Richard Hilgert, a Chicago- based analyst with Morningstar.
—Bloomberg News
