Pellegrini’s Hedge Fund to Return Money to Investors

| August 21, 2010 | 0 Comments

Paolo Pellegrini, the investor who helped hedge-fund manager John Paulson score more than $15 billion of profits betting against risky mortgages, is returning money to clients of his own hedge fund after suffering losses this year.

Mr. Pellegrini’s PSQR Capital has lost about 11% so far in 2010, according to a person close to the matter. The decline included a drop of about 8% in July, after bets against U.S. Treasurys and other moves went awry. The loss has made it more difficult for him to raise cash from investors.

Mr. Pellegrini’s fund gained more than 61% last year, and he had hopes of growing the firm, which he launched after leaving Paulson & Co. But investors have proved reluctant to place money with midsize hedge funds over the past year. The decision was reported by AR Magazine.

In a letter to his investors this morning, Mr. Pellegrini, who has been bearish on financial assets, the dollar and government bonds, said he could reopen his firm to outsiders in the future. For the time being, the firm will invest only his own money.

“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,” Mr. Pellegrini wrote.

Mr. Pellegrini, 53, has been buying industrial commodities over the past year. In his letter, he told his investors he would return their money by September 30.

The move by Mr. Pellegrini comes two days after billionaire investor Stanley Druckenmiller, who once ran George Soros’s hedge-fund firm, told clients he is ending his 30-year run managing money for clients, citing the “high emotional toll” of not performing up to his expectations.

A spokeswoman for Mr. Pellegrini declined to comment.

After joining Paulson & Co. in 2004, Mr. Pellegrini, a former banker and native of Italy, made little mark at the firm as a merger analyst. But soon he began to analyze the soaring housing market and quickly turned bearish. In 2006, Mr. Pellegrini provided Mr. Paulson with data that served as evidence that the housing market would likely collapse. He also helped Paulson & Co. find the riskiest subprime-mortgage securities to bet against, steps that led to the largest trading gain in history.

After leaving Paulson & Co. at the end of 2008 to start his own firm, Mr. Pellegrini led a relatively quiet life, splitting time between his firm’s offices in New York and Bermuda.

His relative anonymity ended in April when the Securities and Exchange Commission charged Goldman Sachs Group Inc. with civil fraud when the company failed to disclose that it worked in part with Paulson & Co. to design a $1 billion collateralized debt obligation. Paulson & Co. eventually made $1 billion of profits from the CDO. It was one of the series of deals that Mr. Pellegrini helped create so Paulson could expand its bearish housing wager.

During the SEC’s investigation of Goldman, Mr. Pellegrini answered questions posed by government officials, according to people close to the matter, telling them that he and Mr. Paulson did nothing wrong. Mr. Paulson and his team, including Mr. Pellegrini, never were charged.

Goldman recently settled the charges, paying the SEC $550 million.

Write to Gregory Zuckerman at

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