Paulson’s Advantage Plus Fund Drops 51% in ‘Aberrational Year’

John Paulson, the billionaire money manager mired in the worst slump of his career, lost 51 percent in one of his largest funds last year amid a failed bet on an economic rebound.

Paulson’s Advantage Plus Fund, which seeks to profit from corporate events such as takeovers and bankruptcies and uses leverage to amplify returns, declined 8.6 percent last month, according to an investor update, a copy of which was obtained by Bloomberg News. The fund’s gold share class dropped 10 percent in December and 36 percent last year.

“Clearly, this has been an aberrational year for us,” Paulson wrote yesterday in a signed letter to investors that was released with the update. “Going forward, we remain committed to restoring all of our funds to profitability.”

Paulson, 56, has scaled back bullish bets across his funds after suffering losses from holdings ranging from Citigroup Inc. to Sino-Forest Corp., the Chinese forestry company accused by short-seller Carson Block of overstating timberland holdings. One bet that worked for Paulson in the first part of the year was gold, which slumped 14 percent in the final four months of 2011, leaving his Gold Fund, which can buy derivatives and other gold-related securities, with an 11 percent loss last year. The fund declined 20 percent in December.

Armel Leslie, a spokesman for New York-based Paulson & Co., declined to comment on the firm’s returns.

Advantage Funds

Paulson’s biggest funds, Advantage Plus and Advantage, employ similar strategies and have $11 billion in combined assets, which are mostly invested in shares of banks, insurance companies and other financial services firms. The dollar- denominated Advantage Fund fell 6.2 percent in December and 36 percent last year. Its gold share class slumped 11 percent last month and 22 percent in 2011. Paulson investors can choose between dollar-and gold-denominated versions for most of the firm’s funds.

Last year was the first time in the firm’s history that Paulson’s Partners Enhanced, Advantage Plus, Advantage and Credit Opportunities funds posted negative annual returns, and the second time his Partners fund lost money during a year, he said in the letter.

Paulson has been betting on a U.S. economic recovery by the end of this year, which led to losses as the European sovereign- debt crisis roiled stock markets and spurred sharp price swings in equities. His bullishness on the economy drove bets in favor of U.S. financial companies, the biggest and worst performing component of the Advantage funds, according to a letter sent to investors in October.

‘Overly Optimistic’

“At the beginning of the year, we positioned our portfolios with net equity exposure appropriate for growth in the U.S. and an orderly resumption of Europe’s sovereign credit issues,” the firm wrote in the letter. “However, as the year progressed, our assumptions proved overly optimistic.”

The Recovery Fund, which invests in assets Paulson believes will benefit from a long-term economic upturn, including hotels, financial services and real estate companies, rose less than 0.1 percent in December and fell 28 percent last year. The gold share class declined 6.4 percent last month and 18 percent in 2011.

The Paulson Partners Enhanced Fund, which invests in the shares of merging companies, decreased 2 percent last month and 19 percent last year. Its gold share class declined 8.7 percent in December and 9.5 percent in 2011.

Credit Opportunities Fund

Paulson’s Credit Opportunities Fund slumped 0.2 percent last month and 18 percent last year. Its gold shares dropped 6.2 percent in December and 5.8 percent in 2011.

Hedge funds fell 4.9 percent last year, according to data compiled by Bloomberg, as global stock markets slumped and the European debt crisis spread and managers struggled with increased market volatility. Hedge funds, which are investment pools that can wager on or against any asset, hold $1.97 trillion, according to Chicago-based Hedge Fund Research Inc.

To contact the reporter on this story: Kelly Bit in New York at kbit@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.