Last updated: September 8, 2010 7:09 pm

Paulson & Co funds hit by US economy fears

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Paulson & Co, the world’s third-largest hedge fund manager, has seen another painful month thanks to growing fears over the health of the US economy.

The firm’s $9bn Advantage Plus fund, which aims to profit from trading corporate events, lost 4.26 per cent in August, according to an investor, wiping out gains made in July. The fund, Paulson & Co’s largest, is down 11 per cent so far this year.

Last month proved worse for the $3bn Paulson & Co Recovery fund, however, which was launched in 2008 to profit from a rebound in the US housing market and economy.

The Recovery fund lost 9.13 per cent in August, erasing a 6.5 per cent gain in July and compounding a 12.6 per cent second-quarter loss. Its performance has been flat to date this year.

Paulson & Co moved in July to scale back the risk across all of its funds after a particularly vicious May and June, which had seen the firm clock some of its worst ever monthly returns.

Bullish positions in banks such as Citigroup and Bank of America, as well as bets designed to pay on an upswing in the US housing market, have soured as investors have reassessed their view of the US economy.

Even Paulson’s $7bn Credit Opportunities fund – which shot to prominence in 2007 thanks to spectacularly successful bets against the US subprime housing market – has seen mixed performance this year. It lost 1.04 per cent in August.

The month was positive for the firm’s Gold fund, however, which returned 9 per cent. Drawdowns in Paulson’s other funds are also likely to have been mitigated for clients that chose to invest in the funds through the firm’s separate gold-denominated share class, designed as a hedge against monetary debasement.

About a third of the $35bn in assets the firm manages, including founder John Paulson’s personal wealth, is estimated to be denominated in gold share classes.

A spokesperson for Paulson & Co could not be reached for comment.

Paulson & Co is far from alone in having had a difficult year. Very few hedge fund managers have reported strong performance in the past eight months.

The average hedge fund manager made just 0.17 per cent in August, according to Hedge Fund Research, and has returned just 1.29 per cent so far this year. Pressure is now on for many managers to deliver stronger returns in the next four months.

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