August 6, 2015 / 4:09 PM / 2 years ago

Exclusive: Banks back away from Paulson Advantage fund after poor 2014

4 Min Read

The logo of Swiss bank UBS is seen at an office building in Zurich July 27, 2015.Arnd Wiegmann

BOSTON (Reuters) - UBS AG UBSG.VX has joined Bank of America in closing down some options for wealthy clients to access billionaire investor John Paulson's Advantage fund, sources said on Thursday, after the portfolio suffered double-digit losses in 2014.

UBS shut down its $50 million feeder fund at the end of July, roughly the same time that Bank of America told its financial advisers they would have to liquidate clients' investments in the fund, once one of Paulson's biggest offerings.

The banks cited concerns about costs, plus bets on illiquid securities as reasons for their moves, according to the sources. UBS clients will still be allowed to invest in Advantage but through a different share class, and it is unclear how many will elect to do so.

Financial advisers at both banks, who had put money into Advantage when Paulson was making lucrative bets on housing and gold several years ago, said they have become concerned about the fund's volatile returns since 2011.

It fell 19 percent in 2014 when it was caught wrong-footed on a failed pharmaceuticals merger, reversing most of a 34 percent gain in 2013, and added to heavy losses the previous two years. It was up 2.2 percent in the first half of 2015.

"Why would you want to keep your money in a fund that isn't performing well?" asked one UBS financial adviser. "I wasn't surprised when the bank told us about six weeks ago that they would kill the feeder fund on July 31."

One person who invested through UBS said he would be getting back only about $140,000 of the $250,000 he'd put into the UBS feeder fund five years ago.

The banks' decision echo similar moves by Morgan Stanley and Citigroup, which pulled out of Advantage in 2012 as the fund's performance began to weaken. JP Morgan never offered its wealthy clients access to Advantage.

UBS launched the Advantage feeder fund in 2009, requiring investors to commit a minimum of $250,000. The fund had about $18 billion under management in 2011, a figure that has dwindled to roughly $2.8 billion since then due to redemptions and lackluster performance.

To be sure, Paulson's $20 billion firm remains one of the hedge fund industry's biggest and the 59-year old investor ranks among its most closely followed.

"I'm a long-term believer in John Paulson," said Dick Pfister, chief executive at AlphaCore Capital, describing the fund manager as one of the brightest minds in the industry. "The Advantage fund has had its difficulties but Paulson has so many other portfolios and many of them are doing great. He has made big bets on themes and many are about to play out."

UBS clients will still have access to Paulson's portfolios. Paulson is offering a separate share class to UBS clients who want to remain in Advantage. UBS clients can also get into the $11 billion Paulson Partners fund, which is up roughly 8.5 percent through the first 6-1/2 months of the year, two sources said.

Bank of America clients also have the choice of rolling money from the Advantage fund into the Paulson Partners fund.

Customers at JP Morgan can access the Paulson Enhanced fund, which is up roughly 20 percent this year. The hedge fund also created a special portfolio for JP Morgan customers to bet on European stocks called the European Event Equities fund.

Later this year the firm will offer a private equity- oriented fund called Paulson Strategic Partners, as well as a stock fund that will concentrate on health-care companies that will be run by Paulson's partner, Guy Levy, someone familiar with Paulson's plans told Reuters.

The fund expects to raise $1 billion and Paulson plans to put in $500 million of his own money as startup capital, the source said.

Reporting by Svea Herbst-Bayliss, Editing by Richard Valdmanis and Dan Grebler

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