Midas touch lost? Paulson hits hurdles in gold fund

By Gregory Zuckerman
The Wall Street Journal
Wednesday, February 10, 2010

http://online.wsj.com/article/SB1000142405274870361590457505379343906245...

It took John Paulson months to convince investors that housing would crumble.

Now it's taking him a while to get them excited about gold, his latest passion.

When Mr. Paulson's Paulson & Co. late last year announced it was starting a hedge fund to make a big gold bet, many on Wall Street expected investors to line up. Paulson & Co. scored about $20 billion in profits in 2007 and 2008 wagering against subprime mortgages and financial companies. It then bought financial shares last year to add more gains.

Some gold traders expected Mr. Paulson's new fund, launched Jan. 1, to raise billions of dollars and even help push gold higher when it started buying this year.

That hasn't happened. Despite months of investor meetings, Mr. Paulson has raised $90 million or so for his new gold fund, according to people close to the matter. Even the $250 million that Mr. Paulson himself placed in the fund hasn't persuaded many investors to get on board.

The fund, despite gains this month that bucked a selloff for gold, has lost about 10% since it was launched, investors say. That's making it that much harder for Mr. Paulson to convince clients.

"I am a long-term believer in inflation, but I feel the weakness in the economy in the short run will trump the longer-term story" for gold, says Christopher Zook, who at CAZ Investments LP invests about $150 million in hedge funds.

Mr. Zook considered but decided not to invest in the gold fund for now. "It's purely my negative view on gold in the short run," he said. "I just am waiting for hopefully a better entry point."

The disappointing response may be a sign that investors are becoming more cautious about the yellow metal, which has declined about 1.7% this year, though it has risen this week.

Shares of AngloGold Ashanti Ltd., one of Paulson & Co.'s biggest gold-mining bets, have fallen to about $37 from nearly $47 in early December.

Mr. Paulson has told his investors he expects his new fund to outperform gold prices as they rise. That suggests it also could do worse than the market if the dollar continues to rally, pushing gold down further.

Some investors have noted that exchange-traded funds that use leverage, or borrowed money, to bet on gold might be able to match Mr. Paulson's fund. By contrast, it was almost impossible for many investors to replicate the complicated derivative moves that Paulson & Co. undertook with its credit funds in 2007 to bet against subprime mortgages.

Also, some Paulson & Co. investors may have had their fill of gold. The firm already has about 10% of its holdings in gold-related investments apart from the new fund.

It's too early to count Mr. Paulson out.

Paulson & Co. raised just $147 million for its first credit fund in the spring of 2006, a time when housing was raging. Money soon was rolling into the fund, however, and his gains turned enormous in 2007.

Some investors are asking why they should pay Mr. Paulson to invest in gold, as he doesn't have years of commodity experience. But some said the same thing about his housing investments before they turned into winners.

Mr. Paulson has told investors that his gold strategy is a long-term one that will reap rewards over the next few years as the value of leading currencies drop. Recent weakness in gold prices could enable Mr. Paulson to buy up gold miners and derivatives at lower prices. That would make it easier for him to rack up gains later on.

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