New York hedge fund Paulson & Co hit paydirt last month by shorting subprime mortgage asset-backed securities via options on the ABX index. The USD4 billion firm posted its best-ever monthly performance as a direct result of the subprime short and issued a special monthly update letter to its investors--it usually makes quarterly reports--to note the occasion. Of the firm's three main strategies, two returned about 24% last month while its newest fund, a credit strategy dedicated to the sub-prime short play, returned close to 40%. Calls to Paulson were not returned by press time.
Short positions in the lower tranches of sub-prime residential mortgage-backed securities accounted for the bulk of the firm's profits in February, its letter states. These positions were also held in the merger-arbitrage strategy. "While not directly related to merger activity, we thought the subprime short...would be an inexpensive hedge for the merger funds," the letter states.
Problems in the subprime sector escalated quickly last month, as delinquencies hit their highest-ever level.
