July 23 (Bloomberg) -- John Paulson, the money manager whose wagers against the U.S. housing market helped him earn an estimated $3.7 billion last year, is now seeking to profit from Wall Street's search for capital to offset mortgage writedowns.

Paulson plans to open a hedge fund by December that will provide capital to the world's biggest banks and brokers as they add to the $345 billion they've raised in the past year, according to two people with knowledge of the matter. His Paulson & Co., which oversees $33 billion, hasn't set a size target for the fund, said the people, who declined to be identified because the plans aren't final.

The New York-based firm's credit funds rose as much as sixfold last year, helped by bets that rising defaults on subprime home loans would pummel the value of mortgage-backed securities. The meltdown has forced the world's biggest banks and securities firms to take $467 billion in asset write-offs and credit losses and led to the collapse of Bear Stearns Cos.

``Investors who are able to make money in a declining market and then rapidly turn around and profit from a rising market is highly unusual,'' said Thomas Whelan, president of Greenwich, Connecticut-based Greenwich Alternative Investments, which advises clients on investing in hedge funds.

Paulson declined to comment. His 2007 earnings made him the highest-paid hedge-fund manager, according to Institutional Investor's Alpha magazine.

`Right Entrance Point'

Losses caused by the credit crisis may reach $1.3 trillion, Paulson, 52, said at a conference in Monaco on June 18. His firm has hired employees this year to research securities firms such as Citigroup Inc. for long-term investment positions.

``We're trying to see the right entrance point,'' he said at the Monaco conference. ``If you invest too early, you lose money.''

The 11-member Amex Securities Broker/Dealer Index slumped 36 percent in the past 12 months, led by declines in Lehman Brothers Holdings Inc. and Merrill Lynch & Co., and U.S. mortgage lenders Wachovia Corp. and Washington Mutual Inc. lost more than 65 percent of market value in the same period.

Barclays Plc, Britain's third-largest bank, agreed last month to raise capital by selling shares to an investor group including the Qatar Investment Authority. New York-based Merrill Lynch, Morgan Stanley and Citigroup, and UBS AG of Zurich also have received capital injections from sovereign wealth funds.

``Paulson has significant knowledge of the subprime market that has created earthquakes for the banks,'' said Ron Geffner, who represents hedge funds at the New York-based law firm Sadis & Goldberg LLP. ``I expect that he understands their experiences, balance sheets and financial exposure better than many.''

Rockefeller Fund

Rockefeller & Co., a New York investment firm, is also raising money to invest in insurers, banks and brokerages, according to James Chang, one of two portfolio managers of the Rockefeller Global Financial Services Recovery Fund LLC.

``We do think that on a long-term horizon of three to five years there are a lot of interesting opportunities,'' Chang said in an interview. ``You have seen in the last several days that a little bit of good news can trigger a rally.''

All of Paulson's funds profited last year buying credit default swaps on mortgage assets, which are instruments that rise in value as the risk of default increases. Paulson told investors in November that he had increased his holdings of derivatives that gain in value when the chances of corporate credit defaults rise.

Bear Pedigree

Companies that Paulson named as representative of deeper troubles included Merrill and Citigroup, as well as bond insurer Ambac Financial Group Inc. and credit-rating firm Moody's Corp.

Paulson started his firm in 1994. He previously was a partner at Gruss Partners between 1988 and 1992 after working for four years at New York-based Bear Stearns, where he was a managing director in the mergers and acquisitions group. Paulson graduated from New York University in 1978 and received a master's in business administration degree from Harvard Business School two years later.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested. The funds declined by an average 1.6 percent in the first half of 2008, according to data compiled by Hedge Fund Research Inc. in Chicago.

To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net

Last Updated: July 23, 2008 15:05 EDT