Billionaire Bio: John Paulson’s Impressive Road to Success

John Paulson is often called “one of the most prominent names in high finance”. With a net worth of over $11B, and a fund with $19B under management, the billionaire certainly lives up to his name.

Below is a closer look at the brain behind the 3rd largest hedge fund in the world — John Paulson.

Early Life and Education

John Paulson was born in 1955 in New York to an Ecuadorian father and a Jewish mother of European decent. He spent his early years in Queens with his three siblings enrolled in local public schools. From an early age, John Paulson proved academic success. In 1973 he entered New York University’s College of Business and Public Administration and graduated summa cum laude with a degree in Finance. In 1980 he received a Masters of Business Administration from Harvard Business School. He gradated Harvard as a Baker Scholar — designation given to the top 5% of the class. On June 3rd, Harvard announced that John Paulson is donating $400 million, the largest gift in the school’s 379-year-old history.

Early Career

The billionaire proved to be a calculated risk taker early on. In the 70s, Paulson took a break from college and went to Ecuador to pursue an entrepreneurial path. While in Quito, he started his first business exporting children’s clothing to department stores back in New York. Soon after he realized the business was not profitable enough, he returned to NYU to continue his studies. After receiving his MBA in 1980, Paulson joined the prestigious consulting firm BCG, but leaves to start a career on Wall Street. He worked for Odyssey Partners, Bear Sterns and Gruss Partners before he opened his own fund in 1994. The success of his firm Paulson & Co. is a well-known story to most.

Paulson and Co.

Founded in 1994 with $2 million and one employee, Paulson and Co. manages close to $20 billion today. At its peak, the fund had $38 billion under management. The firm focuses on event-driven arbitrage strategies including but not limited to bankruptcy reorganization, distress credit, structured credit, and M&A arbitrage. Their “goals are capital preservation, above average returns over the long-term, and low correlation to the markets.”

John Paulson rose to fame in 2007 in the light of the financial crisis. In 2007 alone, after several bets and shorts against the housing market, Paulson and Co. made $15 billion in profit. John Paulson’s personal profit is estimated at $3 — $4 billion. During the financial crisis, Paulson’s bearish view on the credit market went beyond housing and expanded from consumer to corporate debt. In 2008 he bet against large financial institutions in both the US and the UK causing many to fail. Harsh criticism followed. After 2008 his outlook became more bullish.

Despite its tremendous success during the financial crisis, Paulson and Co. went through turbulent times as well. In 2011, the fund Advantage Plus lost half its value when the bet on an early US economic recovery didn’t play out as expected. In 2012, his Gold Fund experienced significant losses bringing the firm’s AUM down around $20 billion.

As of March 2015, Paulson & Co. has $19.4 billion AUM and 125 employees in New York, London and Hong Kong.

Investment philosophy

I really picked up my investment philosophy from Marty and his father, Joseph Gruss. He had two sayings that guided me going forward.

The first was: Watch the downside, the upside will take care of itself. That’s been a very important guiding philosophy for me. Our goal is to preserve principal, not to lose money. Our investors will forgive us if our returns don’t beat the S&P in a given year, but we are not forgiven if we have significant drawdowns.

The other saying really drives the same point from a different angle: Risk arbitrage is not about making money, it’s about not losing money. If you can minimize the downside, you get to keep all your earnings and that helps performance. — John Paulson

2Q 2015 Portfolio Allocation

According to the most recent 13F filing, Paulson and Co. has 47 publicly disclosed holdings diversified across eight sectors. Healthcare alone represents 47% of the equity portfolio.

Paulson and Co. top 10 equity holdings

The 1Y portfolio return has been close to 10%