John Paulson is a renowned hedge fund manager and well known for his merger arbitrage strategy. Paulson made big bets on the supposed acquisition of Shire PLC (ADR) (NASDAQ:SHPG) by AbbVie Inc (NYSE:ABBV). But the deal broke apart on Wednesday, and the Shire stock dropped by around 30% on that day. FBN’s Charlie Gasparino reported on Fox Business that some traders claim John Paulson’s loss to be around $1.5 billion, due to the broken deal between Shire and AbbVie.
Gasparino mentioned that Paulson had around 30 million Shire PLC (ADR) (NASDAQ:SHPG) shares hoping that the Shire stock would get a boost when it is acquired by AbbVie Inc (NYSE:ABBV) as planned. But the deal wasn’t materialized and the Shire stock dropped significantly. Gasparino said that John Paulson follows the arbitrage strategy, which loans the stock of company to be acquired (Shire) and shorts the stock of acquirer (AbbVie Inc (NYSE:ABBV)). In a normal scenario, stock of company being acquired normally jumps and hence giving profits to person holding that stock. But the move backfires with the deal fails.
“[…] the deal wouldn’t happen, it fell apart. So what we understand, this is what the traders in the market place are saying that this may be one of his biggest losses in a long time. […] Because often these deals are leveraged, so it’s not just the amount of shares they have, but multiply because they do options, they do other sort of derivatives to expand their position, leverage their position, obviously the bet. […] he (Paulson) lost big time here. From what we hear, it’s somewhere along the lines of $1.5 billion,” Gasparino said.
Gasparino mentioned that the wild swing in market on Wednesday was not only due to Ebola, Russia and China, but also due to unwinding of many other trades like Shire PLC (ADR) (NASDAQ:SHPG) and AbbVie Inc (NYSE:ABBV). He added that Paulson had to bail out of the situation, which pushed him to sell the shares and buy treasuries. Gasparino mentioned that Ebola and other global headlines had some impact on Wednesday, but majority of it was due to the fact that hedge funds like Paulson & Co running for cover by buying treasuries and selling stocks.
Gasparino added that when the hedge funds go for buying treasuries, the ripple effect make a larger impact. He mentioned that many investors follow hedge fund managers like Warren Buffet and John Paulson and they blindly buy the same stock as the hedge fund managers do.
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