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Paulson gold fund imposes stiff rules, hires gold unenthusiast Reade

Section: Daily Dispatches

Paulson's Golden Investors Have to Commit $10 Million

By Svea Herbst-Bayliss
Friday, November 20, 2009

BOSTON -- Investors tempted to put money into star hedge fund manager John Paulson's new gold portfolio will have to commit at least $10 million and leave the money locked up for at least one year, according to a prospectus.

In return, Paulson & Co., one of the world's biggest and most successful hedge fund firms, says it can deliver returns that top gold prices, at a time analysts are betting that rising demand will make the metal even pricier.

Since founding his New York-based firm in 1994, Paulson has concentrated mostly on merger deals and the credit market. A bet that housing prices could fall on a national level famously earned him roughly $3 billion in 2007. Now Paulson is making a concentrated bet on miners and other bullion-related investments because central banks are buying gold and he expects prices to keep rising as demand outpaces supply.

Gold prices reached an all-time high of $1152.85 an ounce this week.

Paulson has hired two gold industry experts: Victor Flores, HSBC's former senior gold mining analyst, and John Reade, a former senior metals strategist at UBS. Reade had originally planned to join Credit Suisse.

Paulson introduced his plans to some existing investors earlier this week. Other potential clients are getting a look at the details in a private prospectus obtained by Reuters.

While Paulson is best known for his bet on the credit market, he has included gold stocks in his funds for several years and currently has at least 10 percent of the firm's roughly $30 billion invested in this sector. Paulson's Advantage Plus fund has gained 18.62 percent this year, topping the Standard & Poor's 500 14.72 percent gain, in part because of out-sized gains in certain gold stocks. The fund holds AngloGold Ashanti, which has outperformed the rise in gold prices by 30 percent this year, and Centamin Egypt, which has gained 118 percent since Paulson began buying it at $1.26 in 2007.

Potential investors in the new fund, which is set to launch in January, will pay Paulson a 1.5 percent management fee and a 20 percent incentive fee. Analysts termed those rates reasonable considering Paulson's track record and the fact that some other prominent fund managers command performance fees of 30 to 50 percent.

Investors will be able to get their money back twice a year after having given the fund firm 60 days' notice.

The minimum investment is considered high at a time when investors are still smarting from losses of about 19 percent in 2008 -- a slump that prompted pension funds, endowments and wealthy individuals to pull billions out of the $1.5 trillion industry.

Gold has long been popular as a hedge against inflation, which some economists fear is on the verge of rising sharply given extremely low interest rates set by the U.S. Federal Reserve and other central banks.

Paulson's prospectus quotes William Poole, the former president of the St. Louis Fed, as saying "We are very vulnerable to an inflation explosion."

While Paulson's portfolios have long been winners, some potential investors expressed concern that the portfolio could be volatile and fall fast if gold prices retreat.

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Paulson Hires Gold Stars for His Fund

By Carolyn Cui
The Wall Street Journal
Friday, November 20, 2009

Hedge-fund manager John Paulson has hired two high-profile gold analysts as he ramps up his new gold fund.

John Reade, who was head of precious-metal strategy at UBS AG before briefly joining Credit Suisse in October, will join Paulson & Co. in mid-January and be based in London, according to people familiar with the fund.

Victor Flores, a senior mining analyst with HSBC Holdings PLC, joined the firm in New York.

Mr. Paulson told his investors this past week that he will start a new fund in January that will invest in shares of gold miners and other bullion-related investments. He argued that the bull run for gold was only at its start at Tuesday's meeting with investors.

Mr. Reade, who spent 13 years at UBS, is well-regarded in the industry. In early February when gold was trading below $900 a troy ounce, his team at UBS sharply raised its gold-price forecast to an average $1,000 an ounce from $700. So far this year, gold has averaged $953. However, he warned in late September that gold could expect a correction, triggered "by a pause to U.S. dollar weakening."

In August, Mr. Flores, as a lead author of "The Senior Gold Book" at HSBC, wrote that the dollar "continues to pay the price for years of financial indiscipline," which should support gold prices.

However, in the same report Mr. Flores noted that buyers have overpaid to acquire gold-mining companies during the past decade because of high gold-price assumptions. "Most of the potential value created by the deals ... was eaten up by the premium that was paid," he wrote.

This finding could serve as a cautionary call to Mr. Paulson, who has been on a buying binge of gold producers including shares of AngloGold Ashanti Ltd. and Kinross Gold.

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