Further to my thoughts on Jesse Livermore and the subprime fiasco, I thought I’d make a near-end-of-year post looking at the biggest winning trade of the year.
The trade I’m talking about is John Paulson’s shorting the subprime credit markets.
Paulson’s NY based hedge funds have made a profit of $12 billion to date on these positions. If Paulson were to take a 25 percent personal cut of the profit, his year’s trading will have netted him a personal fortune of close to $3 billion – the largest personal sum anyone has ever made from a bet on the markets.
In comparison with Paulson’s profit, Jesse Livermore’s $100 million profit from 1929 is no mean feat – worth somewhere between $1 billion and $12 billion when adjusted for inflation.
In fact, Paulson’s personal cut is likely to be lowered as he is believed to share (an unknown) proportion of his earnings with the teams of analysts and traders who help run his funds.
Even in mid-year, before his position had been fully rewarded, Paulson had joined Forbes Rich list – the list of America’s 400 wealthiest people – shooting from nowhere to No. 165, equal with Oprah Winfrey. Paulson’s current position in the Rich List is unknown but it’s certain now to be considerably higher than the more famous Winfrey’s.
In addition to making vast amounts of money, Paulson also seems to share Jesse Livermore’s passion for the good things in life. Like Livermore, Paulson enjoys sailing and – according to Bloomberg – he lives in a 28,000-square-foot, or 2,600-square-meter, $14.7 million home off Fifth Avenue
When Paulson was raising money last summer, he claimed that “in his entire career he’s never seen such a big opportunity.”
Kyle Bass, who runs Hayman Capital, a Texas hedge fund, is quoted by the Financial Times saying the short credit trade is “by far the best risk/reward position I have ever seen.” One of Paulson’s investors told the FT: “He’s really made a lot of money out of what has in essence been quite a conservative bet. There’s no doubt it’s been one of the greatest trades of all time.”
At the end of September Paulson told investors he saw “only” a further 30 to 40 percent in the trade – and it made almost 22 per cent in October.
Paulson took positions based on buying credit default swaps on mortgages. The value of these instruments increases as the risk of default increases.
Arpad Busson is another hedge fund manager with a taste for the high life. He is one of Elle Macpherson’s former partners and has been romantically linked with actress Uma Thurman. Busson’s EIM group has money with Paulson.
According to Busson the great merit of Paulson’s trade was not merely the prediction of the crisis, but also the execution of the trades. Paulson – and several other managers – constructed complex portfolios of the instruments they believed would be worst-hit, rather than just shorting an index.