John Paulson and Philip Falcone will forever be linked by their respective fortunes—and sudden fame—stemming from huge bets they made against the housing market in 2007. But the association may begin and end there. Paulson personally made $3.7 billion that year while Falcone made a relatively paltry $1.7 billion, according to calculations I made at the time for what is now AR-Alpha magazine.
At the time, a prominent hedge fund manager who wanted to remain anonymous predicted that Falcone was more likely to enjoy a long prosperous career.
Initially he was wrong. Since that fateful 2007 year, the duo has indeed embarked on divergent paths. In the ensuing three years Paulson personally made more than $7 billion betting on the rebounding stock market, especially banks and the surge in the price of gold, among other investment plays. Paulson became perhaps the most watched hedge fund managers.
Falcone, on the other hand, has ridden a dizzying roller-coaster ride that has no doubt left the Minnesota-native queasy. He lost more than 29 percent in 2008 before rebounding with a better than 46 percent gain in 2009, before losing 12 percent in 2010. What’s more, his assets under management recently rose, to just $6.5 billion, but still way down from a high of $26 billion.
But 2011 is another story. Most of Paulson’s funds are down between 20 percent and 47 percent, thanks to his bets on bank stocks and a recovering economy. Now his future is being debated, and the debate will continue if he widens his losses this year and is unable to reverse the trend in 2012.
Falcone, on the other hand, is faring pretty well. His Master Fund is up 4 percent through September while his smaller Blue Line fund, which specializes in the credit markets, was up more than 16 percent, according to knowledgeable sources.
Not that Falcone has escaped trouble entirely. Roughly half of his Master Fund’s assets are invested in LightSquared, the controversial telecom company that is building a wireless broadband network. Harbinger reportedly invested $3 billion of his firm’s assets alone in the company.
And since it is public, half of the fund’s returns are reliant on the value assigned a private company, albeit by an independent third party.
However, keep in mind that other hedge funds have investments in private companies, including Chase Coleman’s Tiger Global, which has made big bets on private—and publicly traded—internet companies.
Since his initial investment, of course, Falcone has been heavily criticized for making such an outsized bet on one privately-held company, which had needed additional financing to achieve its goals.
However, earlier this summer, Sprint agreed to a 15-year deal with LightSquared to share costs associated with developing spectrum hosting and network services, 4G wholesale, and 3G roaming. LightSquared also said it has raised $2.3 billion in the past year alone.
Published reports have also suggested Falcone and friends used donated funds to Democratic officials to help get a conditional waiver last January that allows the company to use non-satellite phones on its network that would interfere with global positioning satellites.
On Thursday, however, LightSquared announced it has collaborated with several high-tech companies to develop solutions to the GPS interference issue.
LightSquared, of course, is not Falcone’s only investment. At the end of the second quarter, Falcone’s largest public position was a $900 million stake in Spectrum Brands, a consumer products company known for brands such as Rayovac batteries, Remington shavers, George Foreman grills and Black&Decker Home. The shares are held by Harbinger Group Inc., a publicly traded holding company that seeks to acquire companies, and is controlled by Harbinger Capital.
Otherwise, Falcone’s remaining 20 equity positions were small stakes in a wide variety of companies.
Falcone has also suffered other bad publicity of late. In September a published report said he owes more than $192,000 in taxes for two homes on the Upper East side.
Regulators have also investigated a $113 million personal loan he took from his hedge fund and which he recently paid back.
For now, however, he can revel in the fact that it is he—and not Paulson—is assured to see another year without worrying about how many investors are going to bail out at the end of the year.
