Oct. 27 (Bloomberg) -- Paolo Pellegrini, the former Paulson & Co. hedge-fund manager who helped make more than $3 billion with bets on a U.S. housing crash, said shorting long-term U.S. debt is the “only attractive bet” for investors.

“I always like to think about assets that are likely to experience a breakdown; the only thing I’m pretty comfortable with right now is U.S. Treasury securities and U.S. agency mortgage-backed securities,” he said in a telephone interview from Beijing today. “I think that those are overpriced so they are attractive shorts.”

Mortgage-backed securities issued by U.S. agencies including Washington-based Fannie Mae are also attractive shorts, he said. In a short sale, a manager borrows a security and sells it on the expectation that the price will fall and the security can be repaid at a cheaper price.

Pellegrini, former manager of Paulson’s credit- opportunities funds, left in December 2008 to start a new macro investment fund called PSQR Management LLC in New York that trades everything from commodities to currencies and aims to profit from changes in the global economy.

The benchmark 10-year U.S. note yielded 3.49 percent today, less than the average for the past decade of 4.49 percent.

Pellegrini disagrees with the U.S. Federal Reserve’s monetary policy, claiming it is cheating savers to pay for the aftermath of the financial crisis, adding that the devaluation of the dollar is a “particular concern” for investors like himself who hold dollar assets.

“The dollar has depreciated more than it should for the short term,” Pellegrini said in a Bloomberg Television interview in Beijing. “And if you ask me where am I putting my money now, I am on the sidelines.”

Galleon

Managers of global macro hedge funds returned 3.1 percent in 2008, when the industry posted an 11 percent drop in its worst year on record, according to Singapore-based Eurekahedge Pte. The strategy returned 10 percent this year through September, compared with a 16 percent advance by the Eurekahedge Hedge Fund Index.

Pellegrini, who will open his $100 million fund to outside investors next year, returned about 80 percent through September, he said.

Pellegrini says he is not concerned about the ability to raise money from investors in the wake of insider-trading investigation into Galleon Group LLC.

“It is distressing that somebody with that kind of money would get tangled up with this kind of controversy,” Pellegrini said. “I don’t have any particular concerns about the ability of good funds to raise money in this environment and the global macro theme is very timely right now.”

Raj Rajaratnam, co-founder of New York-based Galleon, was arrested on Oct. 16, charged with using inside information to trade shares including Google Inc. of Mountain View, California, and McLean, Virginia-based Hilton Hotels Corp., according to complaints. Five other defendants were also arrested in New York and California in a $20 million scheme that prosecutors say is the largest-ever insider trading case involving hedge funds.

Mortgage Bet

In 2006, Pellegrini and John Paulson, founder of New York- based Paulson & Co. with about $29 billion is assets, said investors were overvaluing mortgage-backed securities after misjudging their loss risk, according to client letters obtained by Bloomberg News. The firm’s credit-opportunities funds soared about sixfold in 2007 as mortgage defaults rose and the value of the securities declined.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

To contact the reporter on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net

Last Updated: October 27, 2009 13:14 EDT