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John Paulson Has Figured Out A Way To Save On Taxes Without Having To Run A Fund That Loses 58% First

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A couple weeks back, we went on the record to say that John Paulson was in the early stages of a grand comeback. The hedge fund manager, who had become a billionaire many times over thanks to his subprime bets, only to spend the last several years sucking a magnificent amount of wind, had finally turned things around in his Advantage and Advantage Plus funds, which gained 5.6 percent and 7.6 percent, respectively, in March. Like us, Paulson obviously saw the tides turning and while that had to have felt good, it left him with a bit of a conundrum.

While seeing Advantage plus lose over half its value from the end of 2010 through March of this year was probably not exactly JP (nor his investors') idea of fun, the situation did present a unique silver lining, in that it meant that during the annii horribilis, those invested in the fund did not have to pay Uncle Sam a dime. Sensing a change in his investing karma, Paulson clearly panicked, waking up in the middle of the night to ask himself: 'But wait? How am I going to replicate the euphoria of paying no taxes, without managing a hedge fund that loses a fuckton of money first?'

Paulson didn't know but apparently the answer in part was to become a tax professor, figure it out, and then teach a class based on his findings.

Billionaire hedge-fund manager John Paulson, who last month considered a move to Puerto Rico to lower his tax bill, is starting a fund to help investors reduce the amount they owe to the U.S. government. Paulson’s $18 billion hedge-fund firm invited prospective clients to an April 24 event at Paulson & Co.’s New York offices, where the 57-year-old founder will talk about the Paulson Partners Premium LP Fund, described as a “risk- arbitrage fund for investors looking to mitigate income taxes.” The 75-minute presentation will include a 15-minute discussion of tax-deferred or tax-free investing in the fund,1 according to the invitation, a copy of which was obtained by Bloomberg News...Paulson’s Advantage Plus Fund, once part of the firm’s largest strategy, has fallen about 58 percent from the end of 2010 through March, meaning investors have paid no taxes on the fund in the last two years. All five of Paulson’s strategies began the year below their so-called high-water marks, putting longer-term clients in a favorable tax position...Paulson and his employees may benefit from the new fund, as they account for more than 60 percent of the firm’s assets.

While this is all pretty exciting for Paulson & Co, not everyone is as thrilled.

“He seems to be more focused on avoiding income taxes than on generating returns for his investors,” said Brad Alford, head of Atlanta-based Alpha Capital Management LLC, who runs amutual fund of funds that invests in hedge funds.

What Brad Alford doesn't understand is that John Paulson is a maverick. A legend. A visionary the likes of which this industry has never seen. He doesn't think avoiding taxes and caring about investors are mutually exclusive philosophies. In short, some managers see tax bills as they are and say 'pay.' John Paulson sees tax bills that never were, and says "pay not."

John Paulson to Start Fund to Reduce Clients’ Tax Bills [Bloomberg]

1.Please say the remaining 60 minutes will consist of a dramatic reading of The Greatest Trade Ever.


Paulson and Co Investor Finds New And Interesting Way To Kick John Paulson When He's Down

As Paulson and Co employees, clients, and people named John Paulson do not need to be told, the past year and half has not been the most joyous of times for the hedge fund giant. After making billions shorting subprime mortgages, the firm ended 2011 down 55 percent, was down 16 percent through the first half of 2012, and as of July, saw assets under management decline 44.9 percent to $21 billion from $38.1 billion, due to a combination of unfortunate performance and redemptions by investors so angry at the fund that they've felt the need to repeatedly tell anyone who will listen that parting ways with P&C was among the best if not the best decision they've ever made. One investor that hasn't had to consider voicing its unhappiness to the press or even worry about losing money at all? The 92nd Street Y. Last November Paulson guaranteed that he would personally cover their losses, whatever they turned out to be, come year-end. And the generosity did not stop there: for this one investor only, Paulson offered his services pro-bono, waiving all fees. So while he probably didn't expect representatives of the Y to rent a skywriting plane to proclaim their love and appreciation for him over midtown, lobby the city of New York to get 92nd renamed Paulson Street, or have his face tattooed to their chests, he probably also figured they wouldn't turn around and hit him the mother of all slaps in the face. In this case the declaration that despite the highly favorable terms of their arrangement, any involvement with P&C still felt a tad too risky for everyone's comfort level. In the midst of the financial crisis, the 92nd Street Y came up with a sweetheart deal for its endowment: investments in funds run by the likes of John Paulson, Marc Lasry, and other hedge-fund luminaries that were fee-free and guaranteed against losses. The strategy performed well for several years, said people familiar with how it worked, as the Y benefited from risk-free investing in some of the fund industry’s most successful strategies. But, concerned about the impact of a catastrophe in which a money manager couldn’t repay losses and eager to construct a more diversified portfolio, the Y recently opted to redeem its hedge-fund investments, these people said, and rebuild its financial strategy from scratch. Paulson himself is worth $15 billion, so a catastrophe in which he couldn't repay the Y's losses would have to be a big one. And don't give him some line about how you're pulling out of all hedge fund investments and it's not personal. You could have let him have this. Despite Sweet Deal, 92nd Street Y Redeems Paulson Money [CNBC] Earlier: John Paulson: I’ll Get The Losses This Year, Next Year We Go Dutch?