Profiting from Hedge Funds: Winning Strategies for the Little Guy

Chapter 9

John Paulson

The beauty of shorting a bond is that the maximum you can lose is the spread over the benchmark; yet if the bond defaults, you can potentially make more.1

—John Paulson

John Paulson is founder and president of Paulson & Company, a hedge fund based in New York City. Paulson grew up in Queens, in New York City, and enrolled at New York University in 1973. He became passionate about striking it rich after a visit with his wealthy uncle in Ecuador. In his first really profitable venture, he made $25,000 in commissions by facilitating the export of garments from Quito to department stores in the United States. After receiving a finance degree in 1978, Paulson earned an MBA from Harvard Business School in 1980 as a Baker Scholar. Following the most lucrative career option, he took to consulting. Upon realizing the kind of cash that he was seeking was beyond the reach of even partners in consulting, he moved to Wall Street.

Paulson got a head start in risk arbitrage in the mid-1970s while at New York University, via a seminar by Robert Rubin, who was then a partner at Goldman Sachs. After a stint at private equity firm Odyssey Partners LP, he gained experience in merger arbitrage while climbing the corporate ladder at Bear Stearns. He founded Paulson & Company in 1994 with a focus on merger arbitrage and gained a reputation of investing with very low correlation to the market. The fund, which was ∼$2 million at inception, surpassed $500 million by 2003. The focus ...