Schadenfreude. Media and investors enjoyed John Paulson‘s enormous losses in 2011. His Advantage Plus Fund lost more than 50%, his Advantage Fund lost more than 35%. These figures were widely cited, updated almost weekly, and people made fun of him. He is the “worst” paid hedge fund manager in 2011 according to Forbes. Yes, for some reason Forbes and other publications include Paulson’s personal investment losses as part of his “hedge fund earnings”. Forbes says Paulson lost $3 billion in 2011.
Let’s set the record straight. First, John Paulson isn’t a one hit wonder. He made two giant calls over the last 5 years: short subprime, long gold. He became a billionaire by betting against subprime mortgages. But he made more money by buying gold aggressively after becoming a billionaire. His wealth exceeded $15 billion by the end of 2010. John Paulson’s biggest investor is John Paulson. He invested most of his wealth in his own hedge fund. Most people don’t know that Paulson’s favorite investment idea in 2011 was gold. Most of his wealth was invested in gold-denominated versions of his funds. As a result he lost only 20% of his wealth even though everybody thinks that Paulson’s client lost more than half of their investments.
Another misconception is that Paulson only returned 10% in 2010. Paulson’s Advantage Fund might have returned around 10% in 2010 but Paulson’s gold-denominated funds returned as much as 45%. That’s where most of Paulson’s money is. As a result in 2010 and 2011 John Paulson made a total of $2 billion despite his $3 billion loss in 2011.
How many hedge fund managers made $2 billion since 2009? Six. Only Ray Dalio, Jim Simons, David Tepper, Steve Cohen, and Carl Icahn made $2 billion or more in 2010 and 2011 combined. John Paulson is still one of the highest paid hedge fund managers over the last two years.