I worked software developer for a securitized products prop trading desk at a bank during the up to and during the crisis. Paulson was not the only short.
In particular the two guys who I worked for traded subprime mortgages, and they were net short for two years leading up to the crisis. The first got out of his position as soon as he could take a decent profit. As soon as he got paid that year he quit (and I believe left the industry), his parting words were to the effect of "Being told your wrong and you don't know what your doing every week for two years takes its toll. I'm out." The other guy is more interesting. He was very model driven, and kept his trades on longer. Eventually though he began to distrust his model. His models pointed to the market going much much lower, and he didn't think that was possible. His gut told him that his model had become detached from reality, so he took his profit, and put on a much more conservative trade. Turns out his model was right and his gut was wrong.
This was a prop trading desk for a bank, not a hedge fund. In the end, none of it mattered. These two guys showed profits on the order of hundreds of millions, while the bank overall lost on the order of tens of billions, so kind of a drop in the bucket.
It was pretty interesting work, and working for a really bright guy was great.
The work largely dried up in 2008. We were all laid off. There was still some stuff going on, but between streetwide layoffs, and Bear and Lehman and Wamu and Countrywide and Merrill, there were a lot more people than jobs.
With respect to input to the models the main idea was risk neutral pricing from more liquid (ABX indices) to less liquid (Subprime MBS bonds). But he had special sauce which he kept very close to the vest, and didn't really look for any input (although very open to any pragmatic implementation w/ respect to the software. )
In particular the two guys who I worked for traded subprime mortgages, and they were net short for two years leading up to the crisis. The first got out of his position as soon as he could take a decent profit. As soon as he got paid that year he quit (and I believe left the industry), his parting words were to the effect of "Being told your wrong and you don't know what your doing every week for two years takes its toll. I'm out." The other guy is more interesting. He was very model driven, and kept his trades on longer. Eventually though he began to distrust his model. His models pointed to the market going much much lower, and he didn't think that was possible. His gut told him that his model had become detached from reality, so he took his profit, and put on a much more conservative trade. Turns out his model was right and his gut was wrong.
This was a prop trading desk for a bank, not a hedge fund. In the end, none of it mattered. These two guys showed profits on the order of hundreds of millions, while the bank overall lost on the order of tens of billions, so kind of a drop in the bucket.