
John Paulson’s Fall from Hedge Fund Stardom - chollida1
https://www.nytimes.com/2017/05/01/business/dealbook/john-paulsons-fall-from-hedge-fund-stardom.html
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startupdiscuss
Some of the comments here by people who think that he got spectacularly lucky
one year and might be slowly bleeding out might be missing a subtlety.

There is a perfectly rational strategy whereby you lose a little bit of money
every year if you think that the catastrophic tail event is more likely than
other people think and so the risk is mis-priced.

One finance professor described it as a "100 year flood that happens every 7
years."

Taleb believes that this is true of markets and he may very well have a
similar strategy (consistently buy out of the money puts).

We won't know till a certain amount of time has passed if this strategy is
genius or the opposite.

~~~
tryitnow
That's true up to a point - but there are also ways to mitigate against those
losses without completely giving up all the alpha you can get from betting on
extreme tail events.

I'm sure there are some fund managers who do follow this strategy - but they
also mitigate the risks associated with it, which means their extreme gains
are not as extreme as Paulson's, but their losses are not as extreme either.

We hear about Paulson because he's an edge case. We don't hear about the funds
that won big, but not quite as big as Paulson but who have had much better
risk management practices.

~~~
cheez
This is the equivalent of saying you should never lose money. Not sure there
is a fund that has a strategy that is a perfect oracle.

~~~
module0000
The only funds that "never lose money" are the ones us mere peons can't invest
in.

Eg: quant-driven funds that try to buy/sell the edge then profit the minimum
movement 24/7, if those are losing money then they cease to exist - and they
haven't done that yet. The minimum investment in those funds is high 7 figures
though, and that's out of at least my price range for risk capital(and non-
risk capital for that matter).

~~~
cheez
There is only one such fund that has survived over a long period of time and
that is RenTec. As far as I'm aware, there aren't many others.

And my understanding is that no one can invest in RenTec anymore either
because they can't scale the strategy.

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inthewoods
The rumor I always heard on Wall Street about Paulson was that he essentially
stole the idea of the sub-prime short from other investors - but I have no
idea if that is true.

Every bet he's made since has been terrible - I remember him being a part of
the "hyperinflation" crowd buying up gold etc.

In general, this points out the flaws in both active management and hedge
funds. For active management, we see that someone can have an amazing single
year or event and then never perform again. For hedge funds investors, the sad
story of the high fees and underperformance continues - it's a heads I win,
tails you lose structure for investors imho.

~~~
JackFr
I worked software developer for a securitized products prop trading desk at a
bank during the up to and during the crisis. Paulson was not the only short.

In particular the two guys who I worked for traded subprime mortgages, and
they were net short for two years leading up to the crisis. The first got out
of his position as soon as he could take a decent profit. As soon as he got
paid that year he quit (and I believe left the industry), his parting words
were to the effect of "Being told your wrong and you don't know what your
doing every week for two years takes its toll. I'm out." The other guy is more
interesting. He was very model driven, and kept his trades on longer.
Eventually though he began to distrust his model. His models pointed to the
market going much much lower, and he didn't think that was possible. His gut
told him that his model had become detached from reality, so he took his
profit, and put on a much more conservative trade. Turns out his model was
right and his gut was wrong.

This was a prop trading desk for a bank, not a hedge fund. In the end, none of
it mattered. These two guys showed profits on the order of hundreds of
millions, while the bank overall lost on the order of tens of billions, so
kind of a drop in the bucket.

~~~
aswanson
Sounds like interesting work. Did you leave that area of development? Were you
allowed input into the modelling?

~~~
JackFr
It was pretty interesting work, and working for a really bright guy was great.

The work largely dried up in 2008. We were all laid off. There was still some
stuff going on, but between streetwide layoffs, and Bear and Lehman and Wamu
and Countrywide and Merrill, there were a lot more people than jobs.

With respect to input to the models the main idea was risk neutral pricing
from more liquid (ABX indices) to less liquid (Subprime MBS bonds). But he had
special sauce which he kept very close to the vest, and didn't really look for
any input (although very open to any pragmatic implementation w/ respect to
the software. )

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ithinkinstereo
It's interesting that the article doesn't mention the recent suicide by one of
the partners in the firm, who as it happens, was also in charge of Fairfield
Greenwhich prior to joining Paulson & Co. Fairfield was a huge feeder fund to
Madoff.

[http://www.zerohedge.com/news/2017-03-28/partner-paulson-
com...](http://www.zerohedge.com/news/2017-03-28/partner-paulson-company-
jumps-his-death-midtown-manhattan)

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easilyBored
I understand the chase (or I think I do at--that level) but I wonder: why not
buy a huge yacht, some index funds and relax? Go out on top and all. Hand out
chicken to housewives in Sub-Saharan Africa or something. And delay a heart
attack for as long as possible.

Trying to prove he wasn't lucky that one time I guess.

~~~
fullshark
If a bunch of people want to give you money to actively manage why not accept
it?

~~~
easilyBored
Yeah, but if he's involved in managing (probably is) his stress level, blood
pressure etc must be going through the roof. Obviously he doesn't want to be
losing money, at this point it must be about his reputation. My point was that
maybe, just maybe he'd be doing himself a favor if he quit and relaxed. Maybe
add a few years or decades to his life.

At $7 Billion or so networth he'll be fine, without a job. OK, maybe he might
have to skip a meal or two here and there but that's about it :) .

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jondubois
I think the economy is one of these things that no one can understand. There
are just too many players.

We live in a world where it's possible for a Harvard dropout to start a
company with $0 and turn it into a $400 billion dollar company in just a few
years.

It's not so far from the idea that under the right conditions, the fluttering
of a butterfly's wings can cause a Hurricane on the other side of the world. I
don't think anyone can make accurate predictions about the economy, there are
too many things to keep track of.

Any perceived trend is rooted in false consensus.

~~~
fauigerzigerk
_> I think the economy is one of these things that no one can understand._

I think that's overstating it a bit. The economy is certainly a complex
system, but there are patterns we can understand.

We do understand how something like Facebook can come to pass in capitalism.
We just can't predict where, when, what and and who (sorry, ycombinator can do
that of course, but that's an exception :).

We do know that debt and leverage comes with certain dangers and also that
there are counter forces that mitigate those dangers. We just can't predict
very well where and when it gets out of hand.

But to those who reject markets on that basis I want to say that society as a
whole is a complex system as well. We can't really get rid of that sort of
danger.

Nations and democracies can be stable and peaceful for a long time and then
suddenly fracture and drift towards conflict and hostility for no one's
benefit.

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smitherfield
It makes a certain sense when you think about it; people inclined to be
contrarians are sometimes very right while everyone else is very wrong, but
usually the opposite is the case.

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ScottBurson
> Mr. Paulson’s fall from stock-trading stardom underscores a common
> disclaimer in industry parlance: Past performance is no guarantee of future
> returns.

In fact, I recall reading somewhere that they're negatively correlated. If you
want to put your money in a fund, your odds are better if you pick one that
has just had a bad year.

~~~
jstanley
I think you're confusing "funds that did poorly last year are likely to
_improve_ this year" with "funds that did poorly last year are likely to _do
well_ this year". Huge difference.

~~~
tedsanders
Beyond mean reversion, selection could also be an explanation. Funds with the
worst returns are the funds with the highest risk. And funds with the highest
risk may have higher expected returns (all else equal). Of course, with this
model, past winners would tend to outperform in addition to past losers.

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gdulli
> Mr. Paulson, 61, was one of the first people on Wall Street to back Donald
> J. Trump’s bid for the presidency.

> That dismal record is a far cry from nearly a decade ago, when Mr. Paulson
> made nearly $15 billion betting on the collapse of the housing market.

Maybe the pattern is that cynically betting on weakness doesn't work as a
long-term strategy.

~~~
maxxxxx
I wonder if a lot of these guys just had the luck that their instincts aligned
with reality during a certain timespan but when things change suddenly nothing
works anymore.

~~~
GCA10
Champion Roulette Player Loses His Touch

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chollida1
I thought this was a pretty good look at how hard it is to run a successful
hedge fund.

John Paulson was the man who famously had a bonus of billions in 2008/2009 for
his subprime mortgage bets. Since then he's had a pretty tough ride with
losses almost ever since.

~~~
Retric
If your funds can fail consistently for 5 years and people still hand you
billion then that's not exactly unforgiving.

~~~
jacquesm
Like gamblers lining up in front of the slotmachine that people remember made
someone a millionaire many years ago.

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aswanson
"He counseled Mr. Trump on economic matters during the campaign. He gave
$250,000 to Mr. Trump’s inaugural committee. And he recently visited President
Trump at the White House for a “C.E.O. Town Hall....”" ...Steven T. Mnuchin,
the Treasury secretary, has pledged to return the mortgage finance giants to
free-standing publicly traded companies, a development that could make Mr.
Paulson’s funds big profits. Mr. Paulson and Mr. Mnuchin, a former hedge fund
manager, once worked together to pull OneWest Bank out of the wreckage of
IndyMac, a lender that the federal government seized in 2008."

Sounds like an ethically compromised situation to me.

~~~
bwanab
You think his political stance is an attempt to build the conditions for
another large tail risk payoff?

~~~
aswanson
Now that you mention it...time to throw some money into his fund for what
could be a great year for Paulson.

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code4tee
The "hedge" has left hedge funds. If you're losing 15%+ a year for multiple
years you've $&@ed up big time in managing someone's money. When this is
happening when the market are doing the exact opposite then it's amazing these
places are still in business. The percentage of "top money managers" that
consistently fail to beat the plain old S&P 500 index over any sustained
period is shocking. People are finally catching onto this hence why so many
funds are in trouble.

~~~
pedrocr
It's common to have the belief that you should be over-performing the S&P 500
with your money, and thus people will go and search for performance in these
places. In practice beating the index is very very hard. It's impossible on
average if all you are investing in is the assets of the index and something
like the S&P500 or the MSCI World is diversified enough that beating it even
with availability of all sorts of other assets to trade is far from trivial as
well. If you are a retail investor you should just aim to buy the market
average as cheaply as possible. After all you're not contributing anything
special to the market so what makes you think you should be able to extract
excess returns?

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module0000
Investing is hard - or everyone would be doing (and succeeding) it. The only
"wrong" people I hear about in this story are his investors that haven't cut
their losses yet. His job is to operate his fund, which he's doing - the
losing investors job is to protect their capital, which they don't seem to be
doing.

tldr; risk management and all those boring terms people don't want to think
about still apply.

