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Hedge fund superstar Pellegrini to start redemptions on September 30

Monday, August 23, 2010
Opalesque Industry Update – Hedge fund superstar Paolo Pellegrini, who is being credited for orchestrating some of the biggest deals in the subprime bust, has announced plans to throw in the towels and start returning investor’s money beginning Sept. 30 this year, after falling on hard times, various media reported.

Pellegrini, CEO of New York-based PSQR Capital, made the announcement after his fund fell 11% this year, despite gaining more than 60% in 2009, a source familiar with his plans said on Friday, reported Reuters. In the meantime, he will continue to manage his fund using his own money and said he could re-launch it for outside investors in the future.

At the height of the financial crisis in 2008, PSQR posted gains of 40%.

Pellegrini started PSQR after leaving Paulson & Co. in early 2008 and opened it to outside investors later that year, said MarketWatch.

But his fund suffered losses this year after betting on U.S. Treasury bonds, U.S. stocks and the U.S. dollar. PSQR was also bullish on industrial commodities.

But while the U.S. stock market was bearish this year, the U.S. dollar strengthened against other major currencies and the U.S. Treasuries experienced strong rallies in recent months, which pushed yields at record lows.

53-year-old Pellegrini hoped to expand his fund, but his losses made it difficult for him to raise cash from investors, especially when PSQR lost 8% in July, according to the Wall Street Journal.

Compounding his problems was the fact that investors were reluctant to pour their money on mid-sized funds like PSQR. At less than $1bn in AuM, PSQR is a small player by industry standards.

He reportedly told his investors in a letter sent to them: "While my views on global economies haven't changed, I've concluded that substantial additional work is required to position the Fund to profit consistently from those views.”

Prior to opening his own hedge fund, Pellegrini was said to be the genius behind the $15bn windfall made by Paulson’s betting against risky mortgages. A CNBC report credits Pellegrini for providing John Paulson, CEO of Paulson & Co., the data in 2006 on the U.S. housing. He designed a series of credit-default swap purchases for Paulson, including huge investments to short bet on subprime, which generated billions of dollars in profits for the company.

However, Pellegrini was one of those questioned by the government regarding his involvement in the controversial Goldman Sachs product called Abacus 2007-AC1. He was Paulson’s point man in dealing with Goldman regarding the product, together with Fabric Tourre, the Goldman Sachs trader who structured Abacus.

The Securities and Exchange Commission (SEC) accused Goldman Sachs in April this year of misleading investors to bet on a rise in the Abacus but failing to inform them that Paulson was shorting the same product. Goldman eventually settled the lawsuit after paying $500m and admitting negligence. Paulson and Pellegrini were not charged by the SEC.

Pellegrini is the second high-flying hedge fund manager to return investors money in a span of one week. Stanley Druckenmiller announced last week he was shutting down Pittsburgh, Pennsylvania-based Duquesne Capital Management LLC to end a 30-year career, capped with one of the best records in the industry; he generated $1bn for George Soros when he forced the devaluation of the British pound.

Druckenmiller, 57, who manages $12bn in AuM said he would return investors money after he failed to match returns in the past three years. His funds returned an average 30% annually since 1986. His fund is currently down 5%.

Aside from returning money to investors, Pellegrini and Druckenmiller shared the common “mistake” of betting against U.S. Treasury bonds that lost them money, the Wall Street Journal said.

We also heard last week that London firm Eddington Capital Management was to close down all its funds after redemptions had caused assets to fall to a level that was "unsustainable," reported The Telegraph.
- Precy Dumlao

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