Bio & context
Hedge fund manager who made history's most profitable trade by shorting the housing market before the 2008 financial crisis.
John Paulson founded Paulson & Co. in 1994 after working in M&A at Bear Stearns. He specialized in merger arbitrage and event-driven strategies with solid but unspectacular returns for over a decade. In 2005-2006, he became convinced the housing market was a bubble built on fraudulent subprime mortgages. Working with analyst Paolo Pellegrini, Paulson created credit default swaps (CDS) to short mortgage-backed securities. In 2007, his Credit Opportunities Fund returned 590%, earning him personally $4 billion—the largest single-year payday ever at the time. His total profits from the housing crisis exceeded $15 billion. However, his later bets on economic recovery and gold underperformed, showing even legendary traders can struggle. His AUM declined from $38B (2011) to $8B (2020), though he remains a billionaire.
Philosophy in their own words
Identify major market dislocations and structural imbalances. Make concentrated macro bets when risk/reward is asymmetric.
Approach & method
Deep fundamental research into economic trends and financial structures. Event-driven strategies around mergers, bankruptcies, and restructurings. Macro bets on currencies, interest rates, and commodities. Willingness to make large, concentrated bets against consensus when conviction is high.
Key strategies
- 1. Credit Default Swaps: Bought CDS as insurance against mortgage-backed securities default
- 2. Structural Analysis: Identified fraud in subprime lending and unsustainable housing prices
- 3. Timing: Started building position in 2005, peak profits in 2007-2008
- 4. Concentration: Allocated 50%+ of fund to single thesis
- Credit Opportunities Fund: 590% return in 2007
- Personal earnings: $4B in 2007, $5B in 2010
- Peak AUM: $38 billion (2011)
- Largest single-year hedge fund gain in history
- Made $15B+ from housing crisis shorts
- Turned $2B fund into $28B in 2 years
- $1 invested in 2007 fund became $6.90
- Featured in 'The Greatest Trade Ever' book
Key metrics
- 590% return in Credit Opportunities Fund (2007)
- 155% return in Advantage Fund (2007)
- $15B total profit from housing short
- Later struggled: -51% in Advantage Plus (2011)
Post-2008 performance disappointing: gold bet lost billions, recovery funds underperformed. AUM declined from $38B to $8B.
Recommended reading
- The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History (by Gregory Zuckerman)