John Paulson Wins on Real Estate Despite Gold Loses

Tuesday, 18 Jun 2013 08:07 AM

By Michael Kling

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Don't make fun of hedge fund manager John Paulson for losing big on gold.

Some of his gold funds are down by half this year, and Paulson Advantage Funds are up only 4 to 6 percent this year due to plunging gold values.

But gold is a tiny fraction of money his company manages. And he's hit a home run with his real estate funds.

Editor's Note:
The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

The Paulson Recovery Fund is up 27 percent so far this year due to gains in mortgage insurers, MGIC, Radian and Genworth, as well as Fidelity National Financial, a title insurer, CNBC reported.

"The Gold Funds, which represent only 2 percent of our [assets under management], have received a disproportionate amount of attention over recent months and have detracted attention from the performance and positive developments of our other funds, 98 percent of our assets," stated a managing director in a letter to investors, according to CNBC.

However, Paulson remains optimistic about gold, believing that inflation will increase when the Federal Reserve stops purchasing bonds.

Paulson made a name for himself by betting against subprime mortgage securities, a bet that garnered him $15 billion in 2007 when the housing bubble burst and subprime mortgages began defaulting in droves.

Paulson's winning bets against subprime mortgages combined with the more recent picks indicate he understands the housing industry.

"Radian's new business is highly profitable as a result of conservative underwriting standards introduced in late 2008," Paulson wrote in a previous letter to clients, CNBC reported.

"Mortgage insurance stocks remained depressed through the end of 2012 amid lingering uncertainty as to whether they had sufficient capital to absorb losses on delinquent loans originated before the crisis. However, as house prices began to recover, losses started to decline."

Genworth, which the Recovery Fund also holds, recently won regulatory approval to restructure is mortgage insurance business and sold one of its noncore businesses, he said. "We believe there remains considerable upside as the company continues to make progress on its announced restructuring and the housing markets continue to recover."

The fund has also invested in Hartford Financial, Conseco, One West Bank and Extended Stay.

Improving confidence of homebuilders shows that Paulson's assessment of real estate may be correct.

Builder confidence in newly built single-family homes surged eight points to 52 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). A reading over 50 indicates that more builders view sales conditions as good than poor.

"This is the first time the HMI has been above 50 since April 2006, and surpassing this important benchmark reflects the fact that builders are seeing better market conditions as demand for new homes increases," said National Association of Home Builders Chairman Rick Judson. "With the low inventory of existing homes, an increasing number of buyers are gravitating toward new homes."

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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