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Feels like 2008 ---------------------------------------------------- SEPTEMBER 28, 2011 Rivals Scout Paulson Assets By GREGORY ZUCKERMAN John Paulson already has lots to worry about: turbulence in the stock market, a rocky economy and volatile gold prices. As the hedge-fund manager suffers through the worst losses of his career, Mr. Paulson now is facing a flock of vulture investors who hope he will be forced to conduct a fire sale of stock and debt holdings. Rival hedge funds, brokers and other firms are combing through Paulson & Co.'s investments, trying to anticipate what Mr. Paulson might sell if he needs to return cash to investors. According to traders, some firms have been selling investments they have in common with Mr. Paulson, worrying he will have to sell some holdings if clients withdraw cash. Meanwhile, other firms are approaching Mr. Paulson with lowball offers. For example, at least one firm recently offered a below-market price for some of the bonds his firm owns in Lehman Brothers Holdings Inc., according to people close to the matter. Lehman filed for bankruptcy in 2008, but debt issued by the securities firm is still traded. Enlarge Image Bloomberg News John Paulson, above last month at the U.S. Open New York, is facing steep losses in some of the hedge funds he manages—and competitors are taking note. Mr. Paulson's team turned the Lehman offer down, these people say. One broker also was rebuffed when he presented a bid for $1 billion worth of Lehman bonds at the market price, people familiar with the situation said. So it goes on Wall Street when a high-profile investor comes under pressure. As word seeps out, rivals are often eager to find ways to profit—or at least avoid losses—from a competitor's misfortune. A Paulson & Co. representative declined to comment. The recent activity also shows how Mr. Paulson's fortunes have turned. The 56-year-old Mr. Paulson gained prominence in 2007 and 2008, when he scored $20 billion in profits by betting against subprime mortgages. Last year, he racked up another $5 billon of personal gains, thanks to an early investment in gold. Earlier this year, Mr. Paulson held such sway that when he bought an investment, others quickly followed, sending prices higher. His recent bullishness has stood out amid the market's gloom. But because two of Mr. Paulson's largest hedge funds have suffered losses of more than 20% so far this year, through August, some traders believe it is a matter of what—not if—he will be selling. Most of Mr. Paulson's investors must inform him by the end of October if they want their money back by year-end. For now, the requests have been in line with recent quarters, according to someone familiar with the matter. And while brokers say the hedge-fund firm has done some selling in recent days, people close to Mr. Paulson stressed the firm isn't selling the bulk of its debt and equity holdings. "People are looking over his portfolio. There are constant conversations about what he owns," said one hedge-fund trader. "People are avoiding his names or trying to get in front of them." After Mr. Paulson sold $100 million worth of Lehman debt several days ago at prices close to market levels, a number of brokers at large investment banks began reaching out to a number of large investors, including hedge funds, to test their interest in $2 billion to $3 billion of Lehman debt held by Mr. Paulson's firm, say people close to the matter. They said they were told it would cost about $500 million to buy this debt. The calls from brokers caused a buzz on Wall Street, as investors jumped to the conclusion Mr. Paulson's firm was offering its holdings widely to raise quick cash. Still, it wasn't clear whether Mr. Paulson was soliciting the bid or if brokers were simply hoping he would sell if they came to him with a big offer. Lehman's benchmark 6.875% bond due in 2018 has traded down 7% in September, to about 24 cents on the dollar. So far, Mr. Paulson's firm hasn't sold the big piece of Lehman debt, according to people close to the matter. The bonds trade at about 20 cents on the dollar, up from the average cost of 13 cents paid by Mr. Paulson's firm. When a chunk of debt of Harrah's Entertainment Inc. sold earlier this week, traders assumed it was Mr. Paulson selling, and some traders reached out to brokers to see if they could buy more of it, even though there was no evidence Mr. Paulson was selling. Shares in Lear Corp., where Mr. Paulson's firm owned a 4% stake as of June 30, also sank 12% last week. A hedge-fund manger who owns the stock said he thought its underperformance was tied to suspicions Paulson might sell. —Matt Wirz and Steve Eder contributed to this article. Write to Gregory Zuckerman at gregory.zuckerman@wsj.com