OUCH: Paulson's Big Fund Bludgeoned By Gold

john paulson

May 5 (Bloomberg) — John Paulson, the billionaire hedge- fund manager seeking to reverse record losses in 2011, lost 6.7 per cent last month in one of his largest funds as gold-mining stocks dropped, said two people briefed on the returns.

The decline leaves Advantage Plus, which seeks to profit from corporate events such as takeovers and bankruptcies and uses leverage to amplify returns, down 8.8 per cent this year, said the people, who asked not to be identified because the information is private. Since inception in 2005, it has gained 15 per cent annually on average.

Paulson, 56, who became a billionaire in 2007 by betting against the U.S. 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 last month.

“Over the last 12 months there’s been a disconnect between the buyers of gold bullion, like central banks who are strategic long-term holders of gold, and the buyers of gold equities, who may believe gold prices will fall in the short term,” Paulson said yesterday in a letter to investors. “This disconnect has caused a large discrepancy between the gold spot price and the implied valuation of gold through gold equities.”

Gold-mining stocks in the 64-member S&P/TSX Global Gold Index slumped 7.3 per cent in April and 13 per cent in the first four months of 2012. In comparison, bullion fell 0.5 per cent last month amid concern that Europe’s debt crisis may worsen and that a slowdown in China may curb demand for the precious metal.

Miners Drive Losses
The decline in gold miners also drove losses in Paulson’s Gold Fund, which can buy derivatives and other gold-related investments, Paulson said in the letter. The fund declined 5.3 per cent last month and 11 per cent this year. Since inception in 2010, it gained 2.8 per cent annually, on average.

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

Paulson & Co., which manages $24 billion, is the largest individual holder of AngloGold Ashanti Ltd., which lost 6.9 per cent last month and 19 per cent in 2012. The Advantage Plus fund had a 25 per cent allocation to gold-related investments, according to a year-end letter the firm sent to investors.

Paulson & Co. will now send a “brief commentary” along with its monthly performance estimates to investors, Paulson said in the letter. He is seeking to reverse 2011 losses from an ill-timed bet on an economic recovery, which caused him to scale back risk before stock markets started to rally late in the year. About 20 per cent of Paulson’s investor base is currently underwater on the fund holdings, one of the people said.

‘Positioned Differently’
Paulson’s funds rose 1.7 per cent this year through April 30, a weighted average across all strategies, the firm said in its letter, as funds including Recovery and Enhanced climbed.

The Advantage Fund, which employs a strategy similar to Advantage Plus, decreased 5 per cent last month and 6 per cent this year. Since inception in 2004, it gained an annual average of 12 per cent.

“Compared to last year, Paulson Advantage funds are positioned differently and expect to generate uncorrelated returns from event catalysts, not market movements,” Paulson said in the letter.

The Advantage funds had been mostly invested in shares of banks, insurance companies and other financial-services firms. Paulson & Co. sold its entire stakes in Citigroup Inc. and Bank of America Corp., positions that Paulson had started aggressively building in 2009 as part of his bet that the U.S. economy would recover by the end of this year, in the fourth quarter of 2011.

Recovery Fund
Paulson’s Recovery Fund, which invests in assets Paulson believes will benefit from a long-term economic rebound, such as financial services, insurance, hotels and real estate companies, fell 1.4 per cent in April and gained 8 per cent in the first four months of 2012, the people said. Since its inception in 2008, it has gained 5.4 per cent annually.

The firm’s Enhanced Fund, which invests in the shares of merging companies, declined 0.9 per cent in April and climbed 12 per cent this year. Since the fund began in 2001, it advanced 24 per cent a year on average.

Paulson’s Credit Opportunities Fund dropped 0.7 per cent last month and gained 4.2 per cent in 2012. Since inception in 2006, the fund surged 56 per cent a year, which includes a 590 per cent jump in 2007, largely because of Paulson’s bets against the U.S. subprime mortgage market, one of the people said.

–Editors: Josh Friedman, Pete Young

To contact the reporter on this story: Kelly Bit in New York at [email protected]

To contact the editor responsible for this story: Christian Baumgaertel at [email protected]

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