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Saturday 11 October 2008

‘Don’t focus on what you can make, but on what you can lose’

David Craig, a pioneer of the British hedge-fund industry, recalls lessons learned from John Paulson, the New York investor who topped last year’s global earnings league

New York in the mid-1990s: my long-time investing partner Richard Atkinson and I were in the city seeking out people with whom we might co- invest. We had run our own fund — reputed to be the first hedge fund in London — for 11 years, and had progressed to a stage where we thought we were getting good at this sort of talent-spotting. Nonetheless, we were particularly wary of getting fleeced by second-rate opportunists, or worse, fraudsters. We could only avoid that by rigorously counselling with a network of in-the-know types who could help with our due diligence processes. Towards the end of day four we popped in to see Guard Hill, an up-and-coming arbitrage firm resident at the Bear Stearns Galleria on Park Avenue.

As dusk set in outside the windows of the 25th floor, someone in the room suggested that if we had time to spare we might find something of interest if we looked in on a new fund manager who had just set up next door. At the end of a day on the road, I generally like to fold up my papers, call my loved ones in England and get ready for a cocktail or two, so I was not keen. Then Melissa from next door came into the room and, in what I would describe as a Mike Hammer moment, I lost interest in anything other than this creature who had wafted across my line of vision. Without a thought for what we might be getting into, Richard and I followed her into the adjoining office to meet the man behind this new firm: John Paulson.

John did not make a strong immediate impact, but one comes to realise that great investors do not need to be good at presentations. George Soros is a prime example; he often ums and ahs and meanders away into unrelated areas before making his point. That sort of thing can obscure the impression that one might be in the presence of an investment genius.

John wore a double-breasted blazer, a red tie and properly pressed grey flannels. He gave the impression that he had not had a busy or pressured day; that he was watching the market rather than trading furiously. His tone was clipped and serious. I still do not know whether it was anything he said, or whether it was merely my opportunity to impress Melissa, but I heard myself saying to the two (and only) Paulson employees in their 300 square-foot office how pleased we would be to become one of their first international investors, possibly even the first, and perhaps go some way towards matching the $1 million grubstake that John Paulson himself had managed to pull together as his stake in the risk capital of his new Paulson Partners fund.

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