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Thursday 4 December 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

Melissa left — her work was done — but Richard and I stayed on talking to John for another full hour. He began to make a very serious positive impression on us. Walking back to the Carlyle Hotel, Richard and I agreed we were probably not going to be fleeced by this knowledgeable, upright individual. We debated whether we should backtrack on my reckless commitment and check him out a bit more, but realised that no one we knew would even have heard of such a new boy. We made a note to introduce a few London friends to him, but thought it unwise to expose ourselves to judgment by our more experienced American mentors. We would have to wing it. Not much further thought was given to where those decisions would lead.

John Paulson has recently been reported as having raked in a personal income of $3.7 billion in 2007 — making him number one in Alpha magazine’s top ten of hedge-fund moneymakers, ahead of George Soros — by astutely pursuing a strategy for his hedge funds centred around the collapse of the US subprime mortgage market. Paulson Partners now manages more than $30 billion of client assets, and his firm is the talk of New York. Alan Greenspan has signed up as an exclusive adviser, though sadly, Melissa has gone. One way or another, John has come an awfully long way since the Galleria days.

A number of observations of John over the years stick in my mind. Gordon Horsfield, who as chairman of Drax Power in Yorkshire skilfully negotiated a tough and complex capital restructuring of that business with an array of self-interested American creditors and arbitrageurs, points to the clarity of thinking and objectivity that John brought to the negotiating table — and the defining impact it had in helping bring about a conclusion. I have witnessed similar performances on a number of occasions. You have to be very well positioned to hold sway over all the parties through that type of negotiation. John’s recent purchase of 50 million Yahoo shares, to sit alongside veteran raider Carl Icahn, might possibly revive and even turn the tide in the shelved bid from Microsoft.

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