This doesn't seem like a good idea. First, it is a concentrated bet on the hedge fund you run, which also is filled with your own net worth, and now leverages that yet more with a line of credit. This highly correlated risk means that if anything goes wrong, it will do so thrice. While some people might look at this as a sign of confidence -- skin in the game is now a cliché -- from my vantage point it seems unwise.
More intriguing is that the firm's once-in-a-lifetime winning bet against subprime may have been just that. One-hit wonders are common in popular music, and so it seems in hedge funds. Paulson’s assets under management peaked at $36 billion, but now have fallen to $18 billion, about half of which is his own and his employees' money. Given that decline, no wonder the creditors are looking for a further guarantee that the line of credit remains fully collateralized.
All of which points me toward the advice given by my Bloomberg View colleague Matt Levine today:
If you can invest with the best hedge funds, then go right ahead and happily pay up for the alpha. If you can't do that, then invest with the least-expensive Vanguard-type funds. But most of all, avoid the “middle ground of mediocre performance and medium-sized fees.” That is the killer.
Too bad so many hedge funds investors are not listening.