Paulson’s $32 bn funds may be ‘too big to succeed’

NEW YORK: John Paulson started the year overseeing $32 billion in hedge funds, third in the world behind JPMorgan Chase and Bridgewater Associates. Unlike many of his biggest rivals, he’s taking in new cash, raising the question of how much money is too much for a hedge-fund manager.

“There’s no doubt that Paulson is a big draw for investors at the moment,” said Richard Tomlinson, founder of London-based Tomlinson Investment Consulting, which advises clients on hedge funds. “As with all managers that bulk up, there’s always the risk of returns becoming mediocre.”

Paulson & Co differs from many large competitors because it makes concentrated bets, such as the wager against subprime mortgages that helped generate $3 billion of profit in 2007. As assets increase, it can get harder for a fund to find investments big enough to drive returns and to trade without distorting prices.

Paulson’s main $19 billion Advantage funds, which primarily seek to profit on distressed debt, bankruptcies and mergers, have lagged behind peers this year and last after beating them in 2007 and 2008. Armel Leslie, a spokesman for Paulson, declined to comment.

The world’s largest hedge funds are approaching their previous peak assets after recovering from their worst-ever losses and investor outflows in 2008. They are benefiting from a shift by pension funds and endowments to established firms with steady returns and staff dedicated to risk management.