Pellegrini, Paulson Ex-Manager, Shuns Stocks in 2009

January 6th, 2009

By Tom Cahill and Marco Langmann

Jan. 6 (Bloomberg) -- Paolo Pellegrini, the former Paulson & Co. hedge-fund manager who helped make more than $3 billion with bets on a U.S. housing crash, said his new fund will avoid equity markets after last year’s rout.

Pellegrini, 52, a manager of Paulson’s credit-opportunities funds, left on Dec. 31 in an “amicable” separation to start a new fund called PSQR LLC. The New York-based fund will use a strategy known as fundamental macro investing, which trades everything from commodities to currencies and seeks to profit from changes in the global economy.

“I’ll be investing in commodities and interest rates, taking advantage of the imbalances between different countries,” Pellegrini said in an interview with Bloomberg television today.

There will be few opportunities in equity markets in 2009 after the Standard & Poor’s 500 Index dropped 38 percent in 2008 and the MSCI World Index fell 42 percent, Pellegrini said. One of his investment themes will be the changing dynamics between the U.S. and China, he said. The U.S. consumer, whose purchases fueled economic growth for years, can no longer afford to buy at the same pace from Chinese manufacturers, Pellegrini said.

“Right now there’s a regime shift in that the U.S. has been the borrower for many years and China has been the saver,” he said. “The U.S. cannot continue to borrow and increase its debt at a higher rate without increasing its output. It’s not sustainable, at some point the U.S. has to come back to some level of balance.”

Overvalued Mortgages

In 2006, Pellegrini and John Paulson, founder of the New York-based hedge-fund firm with $36 billion is assets, became convinced that investors were overvaluing mortgage-backed securities after misjudging their loss risk, according to client letters obtained by Bloomberg News. The firm’s credit- opportunities funds soared about sixfold in 2007 as mortgage defaults rose and the value of the securities declined.

“There had been a very unusual pricing development in the housing market,” said Pellegrini, who estimated at the time that U.S. housing prices were 30 percent above where history suggested they should have been.

Pellegrini said his new venture, which will be financed with his own capital, won’t have the infrastructure to invest in mortgages. Still, he said shorting, or betting on a decline, in mortgage-backed securities had become too expensive, and some now offered opportunities to buy. “Mortgages are attractive right now based on current prices,” Pellegrini said.

Funds Gain

Paulson Credit Opportunities and Credit Opportunities II funds gained about 15 percent last year through the middle of December, according to a person familiar with the returns. Hedge funds in 2008 suffered their worst year in two decades, with the HFRX Global Hedge Fund Index falling 23 percent.

Pellegrini, born in Milan, worked for investment bank Lazard Ltd. from 1986 to 1995, according to Paulson & Co. marketing materials. Like Paulson, he has a master’s degree in business administration from Harvard University.

“I want to be the pilot of my own boat,” Pellegrini said when asked why he left Paulson & Co. “John Paulson is a very good friend. He doesn’t need any suggestions on how to run money. He knows how to do it.”

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