John Paulson's Gold Hedge Fund Didn't Have Draw Many Expected

As passed on by the New York Times Online's DealBook, the Wall Street Journal has reported that John Paulson has had a hard time raising money for his gold fund:

When news broke that Mr. Paulson’s firm, Paulson & Company, planned to start a fund to to capitalize on the gold rush, some gold traders were betting that Mr. Paulson would be able raise billions of dollars for the venture and that the fund might even push gold higher, The Journal said.

But after months of investor meetings, Mr. Paulson has raised just around $90 million for the gold fund, The Journal said, citing people close to the matter. The Journal noted that investors have been shying away despite Mr. Paulson having injected $250 million of his own money into the fund....

In other words, more than 70% of the fund's $340 million size is Paulson's own money. Given that his announcement was very well timed publicity-wise, and given that he's put a lot of his money where his idea is, the figure is surprisingly low.

The story itself goes into various reasons why Paulson's had trouble raising funds. Some prospective investors, who decided stay out, shied away because Paulson's main fund has about a 10% gold holding. [Evidently, he started by trying to get his regular clients to pony up.] One prospect demurred because he doesn't see inflation as much of a problem right now:

"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."

Some pointed out that a leveraged bullish ETF might be able to match Paulson's own fund. Some wondered if Paulson, who doesn't have much experience in the commodity markets, is the best man to steer a commodity-based hedge fund.


There are two ways to interpret this outcome, which has fallen well below others' expectations. The first, more skeptic-oriented, would conclude that the low amount shows that gold is overhyped. Paulson's clients are sophisticated institutional investors, who aren't prone to making investment decisions under the influence of a TV commercial. They've looked at the prospects with sober and careful eyes, and decided that investing in gold doesn't make sense.

The second interpretation is that the "hype" hasn't been all that powerful or widespread as yet. Rather than push the metal's price to absurd extremes, the publicity has merely made mainstream investors aware of gold as an alternative. That awareness, largely, has not translated into follow-through as of yet. Instead of the metal's newfound press inducing a shipload of money into gold and gold stocks, only a tugboat's ration has come in. That overall reluctance is not consistent with any kind of investment mania.

As might be evident from the way I spelled each out, I lean towards the second interpretation. Most mainstream media coverage has been skeptical of the metal's prospects. The typical gold-related TV commercial these days is an ad from a gold-buying outfit, not from a gold seller. These facts suggest that awareness has spread, but enthusiam (or even decisiveness) has not. If people largely keep their heads, then there's no mania afoot.

One other interpretation: the lack of response to the gold case has led to a lot of potential demand, which won't kick in until or unless the inflation that's supposedly "baked in the cake" makes its appearance. This take isn't dissimilar to the one a Paulson fan would put forth: it's back to the lonely days of 2007 for him.