Non, je ne regrette rien’ – the allocator who exited from John Paulson, by 2007

The practice of ‘sell discipline’ should be exactly that – a ‘discipline’ that investors follow strictly, even if it is painful – and even if in retrospect, it sometimes seems very painful.

As a result of following their unwavering sell discipline, allocators Momentum Global Investment Management sold out of John Paulson by early 2007.

Their exit, as they watched Paulson increasingly invest in assets beyond his original focus on mergers and acquisitions, meant they missed out on his sub-prime bet – said to be the industry’s best – which helped make his Paulson Credit Opportunities fund 299%, his Paulson Advantage Plus 164% and Advantage 108%, in the two years to mid-2009.

MGIM had been an early client of Paulson – they gave him his “thirteenth million” of client dollars back in the late 1990s – but they had redeemed fully by 2007.

MGIM’s CIO John Caulfield has no regrets. “Paulson talked about the sub-prime trade, but we thought him to be an M&A [trader].”

Indeed Paulson was, starting his hedge fund career as a successful merger arbitrageur.

Another long-term investor agreed: “The sub-prime bet did seem a bit ‘outside Paulson’s field’.”

Of course, history shows it reaped Paulson billions in fund gains and remuneration.

But at the time it seemed distant from his earlier style. More recently, some trades similarly distant to M&A punts – notably in gold and even forestry – have brought him and his clients mixed success at best.

Some advisors required Paulson to speak with them on a Bank of America Wealth Management-hosted conference call earlier this month. One feeder fund reportedly redeemed $410m from his $19bn firm.

An examination of fund remits, a sense for what managers should and should not be doing, and then a strong sell discipline convinced MGIM the sub-prime position was not a trade Paulson should be taking with their money.

Caulfield explains: “We thought to speak to some credit hedge funds about the [sub-prime] trade, instead.”

Maybe one reason Caulfield (pictured) and his colleagues can mirror Edith Piaf’s famous words, Non, je ne regrette rien, is because the manager MGIM finally elected made it 223% between November 2006 and December 2008.

MGIM also felt that, even with a just couple of billion dollars under his belt by 2006, Paulson was too large.

His firm’s assets would eventually reach almost $40bn, though they have fallen significantly since then.



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