Banks back away from Paul­son Ad­van­tage fund af­ter poor 2014

The Pak Banker - - COMPANIES/BOSS -

UBS AG has joined Bank of Amer­ica in clos­ing down some op­tions for wealthy clients to ac­cess bil­lion­aire in­vestor John Paul­son's Ad­van­tage fund, sources said to­day, af­ter the port­fo­lio suf­fered dou­bledigit losses in 2014.

UBS shut down its $50 mil­lion feeder fund at the end of July, roughly the same time that Bank of Amer­ica told its fi­nan­cial ad­vis­ers they would have to liq­ui­date clients' in­vest­ments in the fund, once one of Paul­son's big­gest of­fer­ings.

The banks cited con­cerns about costs, plus bets on illiq­uid se­cu­ri­ties as rea­sons for their moves, ac­cord­ing to the sources. UBS clients will still be al­lowed to in­vest in Ad­van­tage but through a dif­fer­ent share class, and it is un­clear how many will elect to do so. Fi­nan­cial ad­vis­ers at both banks, who had put money into Ad­van­tage when Paul­son was mak­ing lu­cra­tive bets on hous­ing and gold sev­eral years ago, said they have be­come con­cerned about the fund's volatile re­turns since 2011.

It fell 19 per­cent in 2014 when it was caught wrong-footed on a failed phar­ma­ceu­ti­cals merger, re­vers­ing most of a 34 per­cent gain in 2013, and added to heavy losses the pre­vi­ous two years. It was up 2.2 per­cent in the first half of 2015.

"Why would you want to keep your money in a fund that isn't per­form­ing well?" asked one UBS fi­nan­cial ad­viser. "I wasn't sur­prised when the bank told us about six weeks ago that they would kill the feeder fund on July 31."

One per­son who in­vested through UBS said he would be get­ting back only about $140,000 of the $250,000 he'd put into the UBS feeder fund five years ago.

The banks' de­ci­sion echo sim­i­lar moves by Mor­gan Stan­ley and Cit­i­group, which pulled out of Ad­van­tage in 2012 as the fund's per­for­mance be­gan to weaken. JP Mor­gan never of­fered its wealthy clients ac­cess to Ad­van­tage.

UBS launched the Ad­van­tage feeder fund in 2009, re­quir­ing in­vestors to com­mit a min­i­mum of $250,000. The fund had about $18 bil­lion un­der man­age­ment in 2011, a fig­ure that has dwin­dled to roughly $2.8 bil­lion since then due to re­demp­tions and lack­lus­ter per­for­mance.

To be sure, Paul­son's $20 bil­lion firm re­mains one of the hedge fund in­dus­try's big­gest and the 59-year old in­vestor ranks among its most closely fol­lowed.

"I'm a long-term be­liever in John Paul­son," said Dick Pfis­ter, chief ex­ec­u­tive at Al­phaCore Cap­i­tal, de­scrib­ing the fund man­ager as one of the bright­est minds in the in­dus­try. "The Ad­van­tage fund has had its dif­fi­cul­ties but Paul­son has so many other port­fo­lios and many of them are do­ing great. He has made big bets on themes and many are about to play out." UBS clients will still have ac­cess to Paul­son's port­fo­lios. Paul­son is of­fer­ing a sep­a­rate share class to UBS clients who want to re­main in Ad­van­tage. UBS clients can also get into the $11 bil­lion Paul­son Part­ners fund, which is up roughly 8.5 per­cent through the first 6-1/2 months of the year, two sources said.

Bank of Amer­ica clients also have the choice of rolling money from the Ad­van­tage fund into the Paul­son Part­ners fund. Cus­tomers at JP Mor­gan can ac­cess the Paul­son En­hanced fund, which is up roughly 20 per­cent this year. The hedge fund also cre­ated a spe­cial port­fo­lio for JP Mor­gan cus­tomers to bet on Euro­pean stocks called the Euro­pean Event Eq­ui­ties fund.

Later this year the firm will of­fer a pri­vate eq­uity- ori­ented fund called Paul­son Strate­gic Part­ners, as well as a stock fund that will con­cen­trate on healthcare com­pa­nies that will be run by Paul­son's part­ner, Guy Levy, some­one fa­mil­iar with Paul­son's plans told Reuters.

The fund ex­pects to raise $1 bil­lion and Paul­son plans to put in $500 mil­lion of his own money as startup cap­i­tal, the source said.

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