John Paulson Ramps Up Financials Exposure: 13F Filing ~ market folly

Saturday, February 20, 2010

John Paulson Ramps Up Financials Exposure: 13F Filing

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.)

Next up is John Paulson's hedge fund firm Paulson & Co. Before rocketing to hedge fund fame, Paulson managed a seemingly mediocre merger arbitrage fund. All of that quickly changed when he shorted collateralized debt obligations and bought credit default swaps in 2005 for his new trade against subprime. At the end of 2007, the Opportunities fund was up 590% and his Opportunities II fund was up 353%.

Wall Street Journal columnist Gregory Zuckerman detailed the impressive wager in the book, The Greatest Trade Ever, one we highly recommend reading. Such amazing performance led Paulson's hedge funds to be the #1 and #4 funds as ranked in Barron's hedge fund rankings (top 100).

For 2009, Paulson's Advantage fund was up 13.75%, his Advantage Plus up 21%, Credit Opportunities up 34%, and Recovery fund up 24.2%, all as noted in our hedge fund performance numbers post. Nowadays, Paulson has found his next big bet: a wager against the US dollar which he is executing via his new gold fund. Next we'll examine their holdings to see what other wagers they are making.

Below are Paulson & Co's long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. All holdings are common stock unless otherwise denoted.

Brand New Positions
Apollo Group (APOL)
Bank of America (BAC-S preferred)
Burlington Northern Santa Fe (BNI) ~ this was a merger arb play and is obviously no longer in the portfolio
CIT Group (CIT) ~ most likely a result of a debt to equity conversion
Chattem (CHTT)
Comcast (CMCSA)
Capital One (Warrants expiring 11/14/2018)
DirecTV (DTV) ~ as a result of the Liberty Media transaction
Encore Acquisition (EAC)
Hyatt Hotels (H)
IMS Health (RX)
JP Morgan Chase (Warrants)
Kraft (KFT)
Lear Corp (LEA)
Liberty Media (LSTZA) ~ again, part of the Liberty Media transaction
Macerich (MAC)
Mead Johnson (MJN)
New York Community Trust (NYB)
Northern Trust (NTRS)
Pfizer (PFE)
Sprint Nextel (S)
3 Com (COMS)
Vail Resorts (MTN)
Valley National Bancorp (VLY)
Wells Fargo (WFC)
XTO Energy (XTO)

Increased Positions
Suntrust Bank (STI): Increased by 1925.4% (not a typo, their previous position was small)
Conseco (CNO): Increased by 579.3%
Ashford Hospitality Trust (AHT): Increased by 283.4%
JPMorgan Chase (JPM): Increased by 250%
Felcor Lodging (FCH): Increased by 247.8%
Marshall & Ilsley (MI): Increased by 117.1%
Citigroup (C): Increased by 68.9%
Sunstone Hotels (SHO): Increased by 25.8%
Pepsi Bottling Group (PBG): Increased by 4%
Gold Fields (GFI): Increased by 2.4%
Starwood Hotels (HOT): Increased by 1.54%
First Horizon National (FHN): Increased by 1.5%

Reduced Positions
Regions Financial (RF): Reduced by 44.7%
Bank of America (BAC): Reduced by 5.5%

Removed Positions (Sold out completely):
CF Industries (CF)
Cemex (CX)
Liberty Media (LMDIA) ~ part of the transaction
Old National Bancorp (ONB)
People's United Financial (PBCT)
Ultrashort Financial (SKF)
Schering Plough (SGP) ~ merger transaction complete
Varian (VARI)
Wyeth (WYE) ~ merger transaction complete

Top 15 Holdings by percentage of assets reported on 13F filing

  1. SPDR Gold Trust (GLD): 17.07%
  2. Bank of America (BAC): 11.49%
  3. Anglogold Ashanti (AU): 8.70%
  4. Citigroup (C): 8.47%
  5. Boston Scientific (BSX): 4.51%
  6. Comcast (CMCSA): 3.75%
  7. Sun Microsystems (JAVA): 3.50%
  8. Capital One (COF): 3.30%
  9. Suntrust (STI): 3.11%
  10. Kinross Gold (KGC): 2.95%
  11. Wells Fargo (WFC): 2.39%
  12. XTO Energy (XTO): 2.35%
  13. Philip Morris International (PM): 2.19%
  14. Pepsi Bottling Group (PBG): 1.97%
  15. IMS Health (IMS): 1.91%

First and foremost we want to address a lot of misinformation that has been floating around regarding Paulson & Co's stake in exchange traded fund GLD. This position is a HEDGE for them. Most hedge funds have share classes denominated in US dollars. While Paulson has this as well, they also have a hedge fund share class denominated in gold. As such, they've stated in the past that their position in GLD is a hedge for this share class.

Many people out there misinterpret this as outright bullishness on gold. After all, it is a truly massive position in GLD that shows up on filings. Paulson is expecting massive inflation and is focused on a bet against the US dollar. He's expressed this bet via his brand new gold fund that invests primarily in the equity of gold mining companies and then also some derivatives on the price of gold. Hopefully this clarifies things and if not, make sure to check out our in-depth examination of Paulson's gold fund.

Turning to Paulson & Co's latest 13F filing, we must remind everyone that a lot of these positions are a result of Paulson's merger arbitrage strategy. Before Paulson became famous with his bet against subprime that netted him billions, he was (and still is) focused on merger-arb. So, keep in mind that a large number of his long positions disclosed here are most likely hedged with paired short positions either in other companies or possibly even against the box.

Paulson & Co took new positions in financials via warrants of JPMorgan Chase and Capital One, as well as preferred unit shares of Bank of America and common stock in SunTrust, Citigroup, and JPMorgan. Some of Paulson's "new positions" are deceiving because they didn't actually buy shares, but instead received equity as a result of various corporate transactions. This explains their 'new' stakes in CIT Group, DirecTV, and Liberty Media. Also, since Warren Buffett's Berkshire Hathaway has purchased Burlington Northern, Paulson & Co obviously no longer hold that position.

However, Paulson's largest new addition was in Comcast (CMCSA) as they brought it up all the way to their sixth largest US equity holding. We also note that Paulson & Co still maintains a large Boston Scientific position and we highlight this because David Einhorn's Greenlight Capital recently assembled a huge BSX position as well. In the past, many investors have voiced concerns about this not being a good investment. But then again, those people aren't Einhorn or Paulson. Lastly, more recent filings indicate that Paulson has added to positions and we've detailed those transactions as well.

Paulson 'sold' his stakes in Wyeth, Schering Plough, and Liberty Media as a result of mergers and other corporate transactions. One notable sale Paulson did make though was relinquishing almost half of his Regions Financial position. To learn more about Paulson and his success, we highly recommend reading The Greatest Trade Ever.

Assets from the collective holdings reported to the SEC via 13F filing were $19.79 billion this quarter compared to $17.1 billion last quarter, so a noticeable increase of well over $2 billion. Remember that these filings are not representative of the hedge fund's entire base of assets under management.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, David Tepper's Appaloosa Management, and Warren Buffett's portfolio. Check back daily for our new updates.

blog comments powered by Disqus