FXstreet

Investors continue to look at the John Paulson as a way to bet on rising merger and acquisition activity globally, as companies look to scale their operations and take advantage of record-low financing costs.

Billionaire John Paulson received a lot of press for a 36% drop in his Advantage Plus fund last year as assets at Paulson & Co. fell below $20 billion. But investors continue to look at the hedge fund manager as a way to bet on rising merger and acquisition activity globally, as companies scale their operations and take advantage of record-low financing costs.

Paulson & Co. saw billions of dollars in net inflows to its largest and longest-standing strategy, merger arbitrage, where performance was roughly flat in spite of legal decisions that hammered some of the firm’s largest positions. The hedge fund entered 2014 with $7 billion dedicated to its merger arbitrage strategy. By the end of the year, assets were $9.2 billion, according to two sources familiar with the matter, even as performance was uninspiring.

Paulson’s un-levered merger fund gained 0.6% in 2014, while its levered fund lost 1.6% over the course of 2014, the sources said. That pales in comparison to the average hedge fund return, and an over 11% gain for the S&P 500, but it is a far cry from a 30% plunge.

Growing assets in Paulson’s merger strategy reflected the benefit of a recent partnership with Schroders and new limited partners across the investor spectrum after opening the funds to new money. The rise in merger AUM, which now represents roughly 50% of the hedge fund’s total assets, also indicates investors continue to view Paulson as a strong way to access rising M&A markets. Activity reached a post-crisis high in 2014 even as mega deals involving Pfizer, Sprint Corp and AbbVie fell apart.

Armed with a near-record amount of money to bet on mergers, Paulson is banking on the notion that some of the fund’s poorest performers in 2014 will reverse course. “Overall, the fund experienced higher than expected volatility in the second half of the year due to uncorrelated events impacting some of our largest positions,” Paulson told his investors in a monthly update.

While Paulson didn’t refer to specific positions, the firm was a major investor in Shire in October when the Treasury Department implemented a rule that limited the ability of U.S. companies to conduct tax-saving inversion transactions, causing the cancellation of its $54 billion sale to AbbVie. Earlier in the year, a long-standing bet on the merger of Sprint and T-Mobile suffered from antitrust regulators open resistance to the consolidation of the third and fourth largest wireless carriers in the U.S.

About broken mergers that weighed on performance, Paulson said in the investor update, “we believe some of these events will not impact the ultimate outcome of our positions and, in some cases, we capitalized on the volatility by adding to the positions at a lower cost basis.”

Shire, an under-performer in the second half of 2014, may be able to quickly recover from dealmaking setbacks. The Treasury rule has effectively grandfathered the Irish-domiciled company’s tax advantages relative to U.S. peers, and nothing in the current law precludes it from being an aggressive acquirer. This week, Shire announced a $5.2 billion deal for NPS Pharmaceuticals that could significantly bolster its drug pipeline.

“You’ve converted a great acquisition target into an acquirer on an ongoing basis,” said one source familiar with Paulson’s thinking. That source compared Shire to Valeant Pharmaceuticals and Actavis , two European-domiciled drug makers who are among the industry’s most aggressive acquirers and strongest performers.


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