Don’t Try to Benefit From John Paulson’s Epic Implosion

In the hedge fund world, lots of managers eventually put together a hot streak.
But eventually, they hit the wall and sustain huge losses. It is only a handful
of managers that have been able to generate standout returns for the long haul,
such as Paul Tudor Jones and George Soros. Interestingly enough, another
investor looked like he could join these elite ranks: John Paulson. During 2005,
he had the foresight to short the subprime market. Then a few years later, he
invested in financial stocks and gold. As a result, Paulson amassed billions for
himself and his investors. But this year, his streak turned into a slump, and
Paulson's flagship Advantage fund is off over 30% (as of the end of August).
Now it looks like other hedge funds are trying to find opportunities that is,
to pounce on Paulson. After all, it's likely his investors will start
redeeming their holdings, which will force selling. So which shares could be
vulnerable? According to the latest securities filings, some of Paulson's top
holdings include Citigroup (NYSE: C ), Wells Fargo (NYSE: WFC ), Transocean
(NYSE: RIG ) and Hewlett-Packard (NYSE: HPQ ). True, these shares already have
seen price drops. But with the redemption deadline for hedge funds coming at the
end of October, Paulson might have no choice but to lighten up on plenty of his
positions (this might be the case with other hedge funds as well). Yet trading
this event could be extremely tough, especially for retail investors. Keep in
mind that Paulson's holdings are highly liquid stocks. So if there is some
dumping, the price impacts are likely to be temporary if even noticeable. There
also is buzz that Paulson might be forced to sell gold. Keep in mind that he has
gold-denominated funds and he also is the largest holder of the SPDR Gold Trust
(NYSE: GLD ). But again, even if there is a major selloff to get liquidity, the
impact is likely to be short-lived. After all, gold is a large global market.
Besides, it still is unclear if Paulson will have wide-scale redemptions. Even
though his recent losses have been substantial, he does have investors who have
generated significant returns throughout the years. Is one year really enough to
bail out? Actually, Paulson might take steps to make concessions to his
investors, such as lowering his fees. This is not uncommon in the hedge fund
industry. So while it might be temping to find opportunities from Paulson's
distress and it certainly points out that even top investors are far from
perfect it probably will not be not worth the trouble. Tom Taulli is the author
of "All About Short Selling" and "All About Commodities." You can also
find him at Twitter account @ttaulli. He does not own a position in any of the
stocks named here.