John Paulson's exit from Sino-Forest Corp. is devastating news for the embattled Chinese forestry company. But it is just as devastating for Mr. Paulson's reputation as a top-notch hedge fund manager.
With Sino-Forest shares down 90 per cent from late March until he unloaded his holdings on Friday, Mr. Paulson is likely nursing losses of more than $500-million (U.S.). But his recent bets on big U.S. banks, in the hopes of an economic turnaround by 2012, are also offside, raising questions about his insight into the current market.
Citigroup Inc. is Paulson & Co.'s third-largest holding and Bank of America Corp. is its fifth-largest holding. Together the two banks make up nearly $3-billion (U.S.) of Paulson & Co.'s $37-billion in assets.
Bank shares have been slumping in 2011 as investors fret over regulatory changes and a steady stream of disappointing data that make Mr. Paulson's upbeat assessment on the economy look increasingly offside. Citigroup has fallen nearly 17 per cent this year, while Bank of America has fallen about 19 per cent.
In the first quarter, Mr. Paulson also made a brave $1-billion bet on Hewlett-Packard Co. , hoping for a turnaround for the struggling computer maker. However, since the end of the quarter, the shares have fallen 13 per cent, a far worse decline than the 2-per-cent slide for the S&P 500.
These missteps are especially painful given Mr. Paulson's recent history of massive gains. He made $15-billion betting against the U.S. housing market in 2007 - giving him a larger-than-life reputation for making contrarian bets that pay off big.
Is he now experiencing what investors call reversion to the mean, in other words, fading back to average? Certainly his other big bet - on gold - will receive extra scrutiny. Paulson & Co. holds 31.5 million units of the SPDR Gold Trust exchange traded fund. The hedge fund's precious metal stake is valued at $4.7-billion, making it by far its biggest holding.
Gold is not far from its record highs. But another enthusiast, George Soros, has moved on, raising some speculation that big gold investors are starting to cash out after a good run.
The stakes are certainly high for Mr. Paulson: A sudden lurch in the gold price could make his misstep on Sino-Forest look like a warm-up act.