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John Paulson, founder of New York-based hedge fund Paulson & Co., became one of the most closely watched fund managers after he earned billions in 2007 by betting against the overheated housing market. (© Reuters/REUTERS)
John Paulson, founder of New York-based hedge fund Paulson & Co., became one of the most closely watched fund managers after he earned billions in 2007 by betting against the overheated housing market. (© Reuters/REUTERS)

Where Paulson goes, do not follow Add to ...

The Wall Street Journal entices readers with an interesting observation: A couple of prominent hedge funds that had made big money betting against the U.S. housing market years ago are now betting on a recovery of two mortgage firms, Fannie Mae and Freddie Mac, that were taken over by the government during the financial crisis.

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The implication: You can follow their lead. The question is, should you?

The hedge funds mentioned are Paulson & Co. and Perry Capital LLC. Both have been buying up the preferred shares – debt securities that are usually bought for their yield – of Fannie and Freddie. These shares have not exactly been thriving though. They now trade just over $5 (U.S.), versus a high of about $25 before the crisis, and no one knows what they’ll be worth even if the U.S. government unloads its stake.

But the biggest concern is with following the lead of the two hedge funds: Just because they made astute bets on the downturn of the U.S. housing market does not mean that they are ideally positioned to bet on an upswing. Getting the bearish timing right is tough; getting the bullish timing right as well is even tougher.

Indeed, Paulson & Co. has been suffering its share of problems recently, mostly due to poorly timed bets on gold. John Paulson, the hedge fund company’s manager, has become the biggest investor in the SPDR Gold Trust exchange traded fund, with a stake currently worth about $3-billion.

His bullishness on gold had seemed like a good reason for other investors to own it – but following Mr. Paulson hasn’t been a profitable trade: The price of gold has slumped more than 16 per cent in 2013 alone.

This isn’t to say that his bet on the preferred shares of Fannie and Freddie isn’t sound. But following top hedge fund managers – or anyone else for that matter – is never a good idea.

Follow on Twitter: @dberman_ROB

 
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