"In the midst of the credit bubble in 2006, we bought protection on our corporate and mortgage credit, which drove our returns in 2007. In 2008, we shifted our focus to shorting the equity of financial firms we thought could fail because of their exposure to credit losses, which was the main contributor to our gains in 2008. In late 2008 and early 2009, as credit markets bottomed, we switched to long distressed credit. From 4Q 2008 through 2Q 2009, we went from having no long exposure in credit to being $25 billion long. Long credit exposure drove our profitability in 2009.
As high yield bonds now trade at par and yields have plummeted, our focus has shifted to restructuring equities as the driver of future returns. While returns in our current-pay portfolio are still decent, we believe going forward the highest returns will be in restructured equities, mergers and acquisitions, and event arbitrage."
John Paulson
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