Hedge fund manager John Paulson has generated billions from making big calls.
His most notable one, of course, was on the implosion of the subprime market
back in 2007. From there, he bet big on a comeback in banks, such as Bank of
America (NYSE: BAC ) and Citigroup (NYSE: C ). He even made a bundle on gold
through a massive investment in the SPDR Gold Shares (NYSE: GLD ). However, as
of this year, things haven't gone so well. For example, it looks like
Paulson's flagship fund, Advantage Plus, is down 31% for the year (as of the
end of July). Even the unleveraged version was off 22% (however, these numbers
certainly are in flux as the markets continue to be extremely volatile).
Granted, Paulson is not alone. It's been tough for many other hedge funds,
especially those that focus on macro strategies like currencies and interest
rates as well as commodities. According to Hedge Fund Research, the average
return for hedge funds is -6.1 for the year. What went wrong? Basically, Paulson
made the bet that there would be more growth in the U.S. and even strength in
the housing market. Well, it's never easy to predict the global economy
especially in today's volatile world. In fact, it looks like even Federal
Reserve Chairman Ben Bernanke has misjudged the problems in the U.S. The gross
domestic product is growing at an anemic 1.3% annual rate, and consumer
confidence has plunged to a point not seen since May 1980. OK, so what is the
lesson here for investors? First of all, it is important to always be cautious,
especially when there is mounting evidence of a global slowdown. Keep in mind
that recessions are horrible for equities and often result in bear markets.
Next, investors should be restrained with stock positions. A stark example is
Paulson's investment in Sino-Forest Corp, which is a large Chinese forestry
company. Because of allegations of dubious accounting, he had to take a big
loss. So while Paulson's bet-the-ranch approach has resulted in substantial
results, it can easily mean disaster. And it doesn't matter if the investor is
one of the world's best. Tom Taulli's latest book is "All About Short
Selling" and he has an upcoming book called "All About Commodities." You
can find him at Twitter account @ttaulli . He does not own a position in any of
the stocks named here.
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