Hedge-fund manager John Paulson has more than a few advantages over the average investor — not the least of which is the apparent clout to approach Goldman Sachs (GS) and convince the bank to create a subprime mortgage product he could bet against at a later date.
The SEC is now investigating Goldman for its role in creating and selling that product — dubbed Abacus 2007-AC1 — while Paulson hasn’t been charged with any wrongdoing. In the end, the Goldman episode may only go to further burnish Paulson’s reputation as a canny investor.
How can you get in on a piece of the Paulson action? Just as many retail investors eagerly follow Warren Buffett’s latest moves, Paulson fans can track his fund’s holdings online in quarterly SEC filings, as well as filings required whenever his fund becomes a “beneficial owner” of a particular company by purchasing more than 5% of outstanding stock.
There is a raft of caveats, however. Timing is one. Beneficial ownership reports must be filed within 10 days of a purchase, but in digging through quarterly reports to the SEC, you’ll be weeks, if not months, behind. What’s more, those SEC forms don’t require disclosure of short positions.
Another issue: Some risk arbitrage plays can be kept confidential, further limiting the ability of individuals to realize hedge fund returns just by keeping an eye on public filings. As an individual investor, you should also be aware of how much risk is taken on by any fund you’re following. “Retail investors do not want to take the kind of risks that John Paulson takes,” says Bruce Greenwald, a professor of finance and asset management at Columbia University’s School of Business.
Here’s a look at some sectors where Paulson has been active in the last few years – and how an individual investor would have done, if he’d followed along. (Paulson & Co. declined to comment for this story.)
Financials
Paulson & Co. started moving into beaten-down financial stocks in the fourth quarter of 2008 and first quarter of 2009. Depending on the exact timing of the trades, the moves were potentially very profitable. The fund first reported holding JPMorgan Chase (JPM) in the first quarter of 2009; since Jan. 2, 2009, the stock has gained nearly 50%. An investor who bought into the bank at a low in early March would have seen the stock rise about 94%. Paulson & Co.’s report for the second quarter of 2009 disclosed a position in Bank of America (BAC). The stock has risen more than 180% since April 1, 2009, the first trading day of the second quarter.
In this case, an individual following Paulson’s path would have done better with index investing. JPMorgan stock has risen nearly 25% since the date of Paulson & Co.’s first-quarter 2009 report to the SEC, but an investor buying into Bank of America on the date of the fund’s second-quarter report would only have seen gains of about 8.6%. The S&P 500 is up 34% since the fund’s first-quarter report in May and 19% since its August report.
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