John Paulson's hedge fund Paulson & Co has disclosed long positions in numerous financial stocks, most notably Bank of America (BAC). In their 13F filing just released yesterday (detailing their positions held as of June 30th, 2009), they reveal a massive $2.2 billion stake in shares of BAC which they received at a nice price of around $10 per share. BAC shares now trade well north of $15, so they've already profited handsomely on that play. And, more importantly, Paulson sees fair value at around $30 within the next 2 or 3 years. We actually noted that we had been hearing Paulson had a large BAC stake earlier on in our recent piece on Dan Loeb's hedge fund Third Point. And, the release of this 13F obviously confirms that. (Dan Loeb's Third Point also owns BAC around $10 and put on a similar play to Paulson). While Paulson's entrance into financials is by no means new, it is definitely more emphatic this time around. Paulson is definitely focused on the recovery meme for now, as he also will be starting a real estate recovery fund.
When we covered Paulson's portfolio last quarter, we noted that he had picked up stakes in Capital One (COF) and JPMorgan Chase (JPM). This time around though, he has expanded his arsenal of financials and has also added Bank of America (BAC), Goldman Sachs (GS), Fifth Third Bancorp (FITB), Regions Financial (RF), First Horizon National (FHZ), Marshall & Ilsley (MI), State Street (STT), Suntrust Bank (STI), and People's United Financial (PBCT).
In order of size, Paulson's top 5 largest financial plays are:
1. BAC: $2.2 billion
2. COF: $372 million
3. GS: $295 million
4. JPM: $238 million
5. RF: $141 million
We also would be remiss if we didn't mention the fact that Paulson has picked up an $83 million stake in the exchange traded fund (ETF) ProShares Ultrashort Financial (SKF), presumably as a hedge to his position. His election to use this vehicle as a hedge is quite curious, as its flaws as an investment vehicle have been well chronicled. Ultrashort funds are leveraged and carry more inherent risk. At the same time, they seek to replicate 2x inverse the *daily* performance of their underlying index (in this case, the financial index). Since it resets performance daily, the fund experiences compounding issues over time. So, the longer you hold the vehicle, the potentially further you drift from accurately tracking the index. While the vehicles do a good job of tracking on a *daily* basis, they are simply better suited for trades, not holding positions.
Daytraders galore will swear by SKF as it minted many of them a pretty penny last October and November when financials were tanking on a daily basis and SKF was soaring. So, it strikes us as very odd that Paulson would use this as his hedging mechanism. You'd think a hedge fund of their reputation and research ability would know the mathematical flaws inherent in the vehicle they've selected. Maybe they are completely aware of it and decided to use it anyways, rather than shorting an index, buying puts on the index, or buying puts on their individual holdings. Who knows... it is all speculation on our part. The main thing to take away here though is still Paulson's large exposure to financials, namely through Bank of America.
At the same time, they undoubtedly have short positions in the sector as well. We have been hearing that Paulson is complementing their long moneycenter banks play by going short select regional banks that have major exposure to commercial mortgage-backed securities (CMBS) and commercial real estate (CRE) in general. This falls under the thesis that these firms would not have to write it down until later this year or until next year and do not have sufficient loan loss reserves set aside. Additionally, we've heard they have shorted select European financials as well. Back in June, we detailed how Paulson had covered their Barclays (BCS) short. We now wonder which institutions they may be targeting, since they had previously been short Lloyds too.
Overall though, the 'recovery' theme plays on for Paulson. Over the past few months, we've seen Paulson go long financials, buy distressed debt he was once shorting, start a real estate recovery fund, and more. One other notable thing to point out about Paulson's portfolio is their massive gold position as they continue to hold a large stake in the SPDR Gold Trust (GLD). However, we want to make sure everyone realizes that this has been labeled a hedge for their fund share class that is denominated in gold. At the same time though, one has to wonder why they also have large positions in gold miners too.
This is not our usual in-depth look at the hedge funds we report on when covering a 13F filing. So, rest assured that we will still be covering Paulson in our upcoming second quarter 2009 edition of our hedge fund portfolio tracking series. We just wanted to cover this major point for now as mainstream media will undoubtedly run like the wind with this development. Stay tuned for more!