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Paulson Steps Up Gold Bet to 44% of Firm’s Equity Assets

Paulson Steps Up Gold Bet to 44% of Hedge Fund’s Equity Assets
Gold bars are displayed for a photograph at Tanaka Kikinzoku Jewelry K. K.'s store in Tokyo. Photographer: Junko Kimura/Bloomberg

Billionaire John Paulson raised his stake in an exchange-traded fund tracking the price of gold while selling other stocks during the second quarter, leaving his $21 billion hedge fund with more than 44 percent of its U.S. traded equities tied to bullion.

Paulson & Co. purchased an additional 4.53 million shares of the SPDR Gold Trust, the firm’s largest position, and bought more shares of NovaGold Resources Inc., according to a Form 13F filed yesterday with the U.S. Securities and Exchange Commission. Gold prices posted their biggest declines since 2008 last quarter.

While Paulson trimmed his stake in AngloGold Ashanti Ltd. and Gold Fields Ltd., sales of energy, financial and auto-parts stocks boosted the relative weighting of gold-related securities in his U.S. stock portfolio to the highest in three years. That’s making the fund more vulnerable to declines in the price of bullion as the hedge-fund manager struggles to reverse record losses last year.

Paulson, 56, has lost 23 percent so far this year in his Gold Fund and 18 percent in the Advantage Plus Fund, in part because of wrong-way bets on mining companies. Advantage Plus, which seeks to profit from corporate events such as takeovers and bankruptcies and uses leverage to amplify returns, declined 51 percent last year.

Concentrated Holdings

Armel Leslie, a spokesman for New York-based Paulson & Co., declined to comment on the filing.

Paulson’s U.S.-listed holdings peaked at $34.3 billion at the end of March 2011, with about $7.7 billion of that amount, or 23 percent, invested in gold related stocks. Since then, the firm’s overall assets have declined more sharply than its investments in the SPDR Gold ETF and gold miners, leaving the funds increasingly exposed to the precious metal.

Paulson had 33 percent of his U.S. stock holdings in gold-related securities at the end of the first quarter and 25 percent a year ago. The firm’s stock portfolio had a 46 percent concentration in gold stocks, including the SPDR ETF, back in March 2009, when U.S. equities hit bottom.

Some of Paulson’s concentration in gold has to do with the structure of his hedge funds, which allow clients to hold their investments in gold- or dollar-denominated share classes. Paulson uses his stake in the SPDR Gold Trust to back the fund share classes that are denominated in gold.

Best Bet

Excluding the SPDR Gold Trust, the funds had 16 percent of their assets invested in bullion-related stocks at the end of June, compared with 14 percent at the end of March and 9 percent a year ago.

Gold slumped 4 percent in the second quarter, the biggest quarterly loss since Sept. 30, 2008. Prices fell as European Central Bank President Mario Draghi and Federal Reserve Chairman Ben S. Bernanke failed to increase stimulus measures, damping the outlook for global growth and demand for the metal as a hedge against inflation. The price is down 0.1 percent since June 30.

Paulson, who became a billionaire in 2007 by wagering against the subprime mortgage market, told clients in February that gold is his best long-term bet, serving as protection against currency debasement, rising inflation and a possible breakup of the euro. Gold miners are historically inexpensive, he said at a meeting with investors in April.

Adding NovaGold

His hedge fund has been buying mining companies as part of the bet on rising gold prices, though losses by the stocks have hurt returns. Paulson added 4 million NovaGold shares, which slumped the most in more than three years last month after Barrick Gold Corp., the world’s biggest producer of the metal, said their Donlin Gold joint venture didn’t meet its investment criteria.

Paulson sold 400,540 American depositary receipts of AngloGold, its second-largest position, and 819,000 ADRs of Gold Fields in the second quarter. The fund disposed of stakes in Anadarko Petroleum Corp., Motorola Mobility Holdings Inc., SunTrust Banks Inc., Tenet Healthcare Corp. and Family Dollar Stores Inc.

Paulson said during a conference call with investors last month that his firm has reduced risk at some of its funds, according to a client, who asked not to be named because the call was private. So-called net exposure in its Advantage funds, which seek to profit from corporate events such as takeovers and bankruptcies, was 11 percent; at the Credit funds it was minus 9 percent; and at the Recovery funds, which bet on assets Paulson believes will benefit from a long-term economic advance, it was 31 percent, the investor said.

Cutting Risk

The Advantage funds had net exposure of 32 percent as of the end of January, the Credit funds were at 27 percent and the Recovery funds were at 55 percent, according to an annual letter sent to clients in February.

Net exposure is calculated by subtracting the percentage of a hedge fund’s short positions, or bets on falling securities, from its long holdings, or wagers on rising stocks and bonds.

Money managers who oversee more than $100 million in equities must file a Form 13F within 45 days of each quarter’s end to list their U.S.-traded stocks, options and convertible bonds. The filings don’t show non-U.S. securities or how much cash the firms hold.

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