Paulson Funds: From Ruth’s Chris’s to Denny’s
Investing in hedge funds is similar to eating at a high-priced establishment like Ruth’s Chris’s (RUTH) – not everyone can eat there and the prices are high. In dining terms, John Paulson, President of Paulson & Co. (approximately $34 billion in assets under management), may be considered the managing chef of the upper-crust restaurant. But rather than opening the doors of his funds to an elite few, Paulson is now making his select strategies available to the masses through a much more affordable structure. Or in other words, Paulson is opening an investing version of Denny’s (DENN), in addition to his Ruth’s Chris, so a broader set of investors can buy into his funds at a reasonable price.
Hedge funds typically are reserved for pension funds, endowments, wealthy individuals, or so-called “accredited investors” – individuals earning $200,000 annually, couples earning $300,000, or people with a net worth greater than $1,000,000. By using alternate structures, Paulson will be able to bypass the accredited investor regulatory requirements and reach a more expansive audience.
UCITS Added as a New Item on the Menu
How exactly is Paulson opening his hedge fund strategies to the broader public on a Denny’s menu? He is assembling what is called a “Ucits” structure (Undertakings for Collective Investments in Transferable Securities). These investment vehicles, adopted in 1985, resemble mutual funds and are domiciled in Europe. Although Ucits have been used by relatively few hedge fund managers, Paulson is not the first to institute them (York Capital, Highbridge Capital Management, BlueCrest Capital, and AHL are among the others who have already taken the plunge). According to the Financial Times, Paulson’s Ucits funds will launch later this year. Part of the reason this structure was chosen over others is because the regulations associated with these structures are expected to be less stringent than other onerous regulations currently being discussed by the European Union.
Will the Investing Mouths be Fed?
Should this move by Paulson be surprising? Perhaps Andy Warhol’s quote about everyone being famous for 15 minutes is apropos. Paulson’s $15 billion subprime housing profits in 2007 (read The Greatest Trade Ever) were a handsome reward and now he is attempting to further his wealth position based on this notoriety. Do I blame him? No, not at all, but time will tell if he will be viewed as a one-hit wonder, or whether his subprime bet was only an opening act. More recently, Paulson has been vocal about his seemingly peculiar combination of bullish wagers on gold and California real estate, which he sees rising in price by +20% in 2010 (see Paulson on California home rally). With his optimistic outlook on the U.S. markets and economy, his gold play apparently is riding on the expectation of a future inflation flare up, not another financial meltdown, which was the catalyst that catapulted gold prices higher in late 2008 and throughout 2009.
I’m not sure how many domestic investors will participate in these Ucits investments, however I am eager to see the prospectuses associated with the funds. Like most hedge funds, caution should be used when investing in these types of vehicles, and should only be used as a part of a broadly diversified investment portfolio. For most investors, my guess is the Paulson funds will have an attractive price of entry (i.e., availability), much like a Denny’s restaurant, but the quality and fee structure may be as desirable as a $5.99 greasy steak and pile of gravy-covered mash potatoes.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct positions in RUTH, DENN, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Entry filed under: Profiles. Tags: accredited investor, AHL, BlueCrest Capital, gold, hedge fund, Highbridge Capital Management, housing, John Paulson, Paulson & Co., real estate, Ucits, York Capital.