Tuesday, September 11, 2007

Excellent timing: John Paulson

You may have heard about the outstanding performance of the Paulson Credit Opportunities Fund, which sailed through, and greatly profited from, the recent credit market turmoil.

The fund, established by John Paulson of Paulson & Co., has done extremely well this year, thanks to its timely shorting of subprime mortgage bonds.

I thought it might be interesting to update our "Subprime: winners and losers" post with a recent profile of John Paulson, man of the hour of the investment universe (and no doubt, man of the year to his investors).

In this July interview with Pensions & Investments, Paulson described the thinking behind his fund's investment stance.

What attracted us to this particular position is that overall, we feel that we are in a credit bubble. We feel that there is too much risk going long (in) credit instruments since spreads are so tight. So we concluded that the best opportunities were on the short side.

The beauty of shorting a bond is that the maximum you can lose is the spread over the benchmark; yet if the bond defaults, you can potentially make more. So it’s an asymmetrical risk-return tradeoff. In the case of subprime securities, we targeted the triple-B bonds, which are the lowest tranches in the subprime securitization.

For more see, "Excellent timing: Face to Face with John Paulson".