Before he began his investment career, John Paulson accumulated academic distinctions.

He was Valedictorian of his class at New York Universit !s "ollege of Business and Public #dministration and received his $B# from Harvard Business %chool as a Baker %cholar, the school!s distinction for the class! to& students. #fter a stint as a management consultant with the Boston "onsulting 'rou&, he (oined )d sse Partners as an #ssociate and moved on to Bear %tearns in *+,- where he became a $anaging .irector in mergers and ac/uisitions. 0n *+,,, he became a general &artner of 'russ Partners. 0n *++-, he started Paulson Partners 1.P., and in *++2, Paulson 0nternational 1td., a com&anion offshore fund. 0n 344*, the firm launched a leveraged version of its funds. Based in New York, Paulson 5 "o. currentl manages 6744 million and is u& over *38 net for the first si9 months of 344:. John Paulson s&oke with H;N &ublisher, #ntoine Bernheim in Jul 344:.

Profile of John Paulson
Born: New York City, 1955 Education: B.S. New York University, MBA Harvard University Family: Recent y !arried wit" a 1#$!ont" o d da%&"ter Last vacation: Be Air'Ma i(%, Ca i)ornia Last book read: *Ro!an+ (y ,o anski Hobbies: Art, S-orts, Socia Favorite quote: *Never &ive %-. Never &ive %-. Never &ive %-.+ $/inston C"%rc"i How he best describes himself: 0ovin& )at"er, devoted "%s(and.

Q. "ould ou describe our a&&roach to risk arbitrage< A. =e o&erate on a global basis which includes the U.%., "anada and >uro&e and have a diversified &ortfolio of merger arbitrage &ositions. )ur goal is to &roduce above average returns with low volatilit and low correlation with the e/uit markets. =e seek to out&erform the merger arb inde9 b minimi?ing drawdowns from deals that break, b weighting the &ortfolio to deals that could receive higher bids, b focusing on uni/ue deal structures which offer the &otential for higher returns and b occasionall shorting the weaker transactions. # ma(or focus of our &ro&rietar research is to antici&ate which deals ma receive another bid and then to weight the &ortfolio toward those deals. =e have a good track record in that area and that has been a ke driver of our &erformance. =e avoid event@t &e arbitrage deals, such as s&in@offs, reca&itali?ations, announced sales or restructurings, as those t &es of deals tend to have more market correlation. )ur correlation with the %5P A44 since *++- has been 4.47. Q. "ould ou describe how trading o&&ortunities in risk arbitrage have changed over the last ten ears< A. )ver the &ast ten ears the Hennessee $erger #rbitrage 0nde9 has &roduced **.28 com&ound annual returns with a standard deviation of :.,8 and a BC vs the %5P A44 of 4.32. =hile the returns over the &eriod are enviable, returns in an given ear can fluctuate. 'enerall , risk arbitrage returns are a function of deal activit , the su&&l of arbitrage ca&ital, and the level of interest rates. 0n *+++ and 3444, for e9am&le, when

>B0D and net incomeE we look at the si?e of the ac/uirer vis a vis the target.. 'enerall . we ma go u& to .#.irst. not far from the ten ear average return and /uite favorable when com&ared to the risk free rate. the &ro&rietar desks at investment banks and third the multi@arb funds which toda allocate a ver small &ortion of ca&ital to risk arbitrage. its growth in sales. =e have ver good outside antitrust counsel and we have a in@house law er to look at an legal issue that ma affect the outcome of a transaction. . one of our anal sts screens the ta&e for an new deals that are announced. =e also e9amine regulator issues that could affect the timing or the ultimate a&&roval of the transactions. and the &remium being &aid. it was about *3A. Q. we do a detailed financial anal sis. business or regulator conditions. =e don!t consider ourselves distressed &la ers but there has been an increasing number of ac/uisitions of bankru&t com&anies. "ould ou describe the structure of our &ortfolio< A. it has been one to one. However. the Hennessee $erger #rb 0nde9 is u& A8 net. &art of our &ortfolio. stock deals and cash@and@ stock deals.%. =e generall don!t use much leverage. Dhe above average returns attracted large ca&ital inflows from tertiar sources. and for a low risk deal with higher &otential returns. Q. %>" filings and the merger agreement.#. )nce a deal is announced. 1ast ear.8 in 344* and a negative *. =hen a firm e9change offer is made to ac/uire a firm in bankru&tc .or the first 2 months of this ear. albeit small.uring the &ast cou&le of ears.38 in 3443. we look for health com&anies being &urchased at reasonable multi&les without e9cessive &remiums.merger activit was at its &eak. when deal activit fell. Dhis ear. s&reads were ver wide and returns averaged in the high teens. . . stock and other forms of consideration.8 or *48. 0n *+++. )ne area that has become more active recentl is what we call bond merger arbitrage. we invested in about *. . =e look at the remaining lower risk deals on a return basis and we tr to focus on deals with lower risk and higher &otential returns. financing. =e are basicall looking for solid merger agreements with minimal conditions. net income and earnings &er shareE we com&ute the merger multi&les to >B0D. Dhis has been a ver &rofitable. =e e9amine the &erformance of the com&an .7A and it has been as high as *. bu ing the bonds instead of the stock and e9changing them for cash or a &ackage of cash. Dhe second stage of our research is to &artici&ate in the management conference callsE review the =all %treet research. Beturns from the Hennessee $erger #rb 0nde9 fell from *7. =e then make an overall assessment of the financial merits of the deal. man of those com&anies are coming out of bankru&tc &ursuant to reorgani?ations or ac/uisitions b third &arties. such as macro funds and investment banks.irst to leave were the macro funds. we can set it u& as a s&read. =e diversif across cash deals.A8 in 3444 to :. 1ast ear there was a record number of bankru&tcies in the U. it has been around 4. second. which we define as longs to e/uit . )ur average &osition si?e is around :8. .:A de&ending on the number and attractiveness of o&&ortunities. 0n our review of the merger agreement. we look for an unusual conditions to the merger such as due diligence. =e tend to be in about thirt to fort deals at an given time. or *48 annuali?ed. )n average.4 deals during the course of the ear. the focus of our research is to eliminate deals that are riskier and have a lower &robabilit of being com&leted. in 344* and 3443 the influ9 of ca&ital overwhelmed the su&&l of deals causing s&reads to com&ress. >B0D. 'enerall . "ould ou describe our research &rocess< A. Dhe reduction in ca&ital combined with the stabili?ation of deal activit has caused returns to im&rove in 344:. Dhe lower returns caused ca&ital to leave resulting in less com&etition for arbitrage deals.

=hen we anal ?ed where we had losses. =e divide deal risk into macro risk and micro risk. $acro risk would be how ma(or market moves could im&act the &ortfolio. "anada and >uro&e. =e also look at the &remium being &aid and the &otential downside in case the deal is not com&leted. . and far greater &rotection of investor ca&ital in market downturns. li/uidit issues.or instance. =e think merger arbitrage is a ver attractive long term alternative investment strateg and can &roduce good returns. a trader!s assistant . the s&read comes back in. =hat are our risk management tools< A. 0n managing mone for ten ears. Dhe onl ear when we lost mone over the &ast nine ears was *++. ta9es. walk@awa clauses or other t &e of market related outs. =e have nine &eo&le. it is e/uall im&ortant not to &anic. $an arbitrage deals will e9&erience some volatilit in the s&read from the &oint of announcement to the &oint of closing. Dhese could include the earnings stabilit of the target. we tr to minimi?e the im&act of market risk b being full hedged on the merger arb &ositions and b eliminating deals that have financing contingencies. . )ur reaction would de&end on our evaluation of the risk. 'enerall . allocation between the U%. a trader. the si?e of our &osition. and sector concentration.B. "an ou describe our organi?ation< A. allocation between cash and stock deals. we found that most of the losses were confined to the event arbitrage &ortfolio. #ndrew Hoine who came from JP $organ and $ichael =aldorf who came from "%. a controller. Q. 'enerall . while it is im&ortant to reduce e9&osure or close out the deal if the risk is serious. FDwo of our anal sts have $5# backgrounds. =e look at deal risk and &ortfolio risk. what have been our worst e9&eriences and what have ou learned from them< A. Q. and the deal closes. Portfolio risk includes such things as average &osition si?e.  . timing and &otential accounting issues. =e want to be one of the to& &erformers in our categor . =e got caught in #ugust *++. and the &otential downside. to& five or ten &ositions. an office manager and a director of marketing. if markets were to fall shar&l or interest rates were to rise. financing. we stress@test the &ortfolio to see what im&act that could have on &erformance. Dhe arbitrageur needs to evaluate wh these s&reads are widening and make a (udgment as to whether it is a tem&orar overreaction or serious risk. )ur goals are to continue to grow our asset base and remain focused on the merger arbitrage area. currenc e9&osure. number of &ositions. in the 1ong Derm "a&ital debacle when we had too great an e9&osure to event arbitrage situations. those tem&orar fears are overblown. the issue is favorabl resolved. 344* and 3443 even though all the ma(or market indices declined. Q. market@outs. with low volatilit and minimal correlation.or e9am&le. we were &rofitable in each of 3444. =e have s&ecific guidelines on all our risk &arameters that we maintain on a real time basis to manage the &ortfolio. when we lost about -8.Q. Dhe micro risks are those risks &ertaining to an &articular transaction that could affect the chance of a deal breaking. legal or regulator hurdles. Ninet &ercent of the times. we have reduced or eliminated our event arbitrage &ortfolio as a wa to reduce our correlation to market downturns and we have had much less volatilit . allocation across different market ca&itali?ations.G =e are contem&lating hiring a com&lianceHrisk management officer. =hat is our a&&roach to cutting losses when a &osition goes against ou< A. %ince then. including three anal sts.