As the historic market collapse felled many investors, a handful set themselves apart by scoring big profits.
Now, several of these money managers expect more bad times ahead, including struggles for consumers, limp earnings and a possible surge of inflation.
They also see pockets of opportunity.
George Soros is bullish on China, India and Brazil. John Paulson is investing in distressed debt, residential mortgages, even bankrupt companies. Alan Fournier, a lesser-known investor with a strong track record, likes some health care shares, while James Melcher, also successful lately, likes corporate bonds.
"We're trying to make hay while the sun's still shining," says Fournier, who runs $2.8 billion Pennant Capital. "Maybe we can rally through the summer, perhaps for another year, but there are a lot of difficult issues that we're going to have to deal with."
Soros is just as wary. The renowned 78-year-old investor and philanthropist calls the current terrain a "trading market," saying in a recent interview that investors should take profits when shares surge, even if they look promising long term.
"I'm not bearish but I don't see how we can have the kind of growth in profits that we had during the superbubble," says Soros, who these days leaves most day-to-day trading decisions at his $24 billion fund to Keith Anderson, a former BlackRock portfolio manager. The fund scored gains of 32% for 2007, 8% in 2008 and 17% so far in 2009. "He's the player, I'm the coach," Soros says.
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"Maybe we're making the same mistake again by thinking that China and India will decouple from the developed world," Soros says. But "China is the major beneficiary of the collapse of the financial system. For them it was an external shock," he says. "Because China is in a position to stimulate its economy, it will be a motor for the global economy," partially replacing the U.S. consumer.
As for Brazil, Soros likes state-owned Brazilian oil giant Petroleo Brasileiro (PBR, news, msgs), for example. But the firm trimmed some of its position earlier this year in the company, known as Petrobras, which has seen a run-up in the share price.
Paulson, who scored collective profits of more than $17 billion in 2007 and 2008 by betting against subprime mortgages and financial shares, sat a huge pile of cash at the outset of 2009 -- some $19 billion of his hedge funds' $30 billion, his investors say.
But as Paulson and his team spent weeks combing through the rubble of the credit markets, they concluded that beaten-down prices assumed a rash of defaults that were unlikely to materialize.
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Now, Paulson is buying shares of financial companies like Capital One Financial (COP, news, msgs) and JPMorgan Chase (JPM, news, msgs), as well as commercial real estate broker CB Richard Ellis Group (CBG, news, msgs) and oil producer Petro-Canada (PCZ, news, msgs), according to public filings.
"While we don't believe bank stocks in general are undervalued, we do believe many represent compelling investment opportunities over the cycle," he says.
His team is buying selectively, as they fear lower growth ahead as consumers struggle. And Paulson is concerned that all the money that the United States and other governments are shoveling at various problems eventually will lead to a surge in inflation.
The stance is controversial -- others say it will be years before inflation becomes a problem. But Paulson is buying protection now; more than 10% of his holdings are in gold, his investors say.
Continued: A downdraft down the line
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