April 5, 2012 12:35 am

Paulson funds claw back lost ground

John Paulson made large gains betting on mergers and acquisitions in the first quarter of 2012, but also saw losses on gold miners, in a mixed performance for his hedge funds as he attempts to recover from the struggles of last year.

The largest fund at Paulson & Co, which has $24bn under management in several investment vehicles, was the $7bn Credit Opportunities fund at the end of the quarter, up 5 per cent so far this year, according to a person familiar with the numbers.

The billionaire investor was one of the most high profile losers in 2011, as big bets on financial companies soured, causing his then-flagship fund Advantage Plus to halve in value. The fund is down 2 per cent so far this year, and the Advantage fund, which follows the same strategy but without leverage, is down 1 per cent, after loses in March offset gains made earlier this year.

The weak performance for the funds comes during a period in which the US stock market rallied 12 per cent, and reflects the challenges faced by hedge funds in attempting to recover from the loses of last year. In response to the volatile markets in 2011, Mr Paulson increased the amount of hedging he used, and also scaled back the amount of stock market risk he was willing to take.

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Many hedge funds have lagged behind this year’s rally for similar reasons, as managers have lacked conviction that stock market strength would be sustained. The average hedge fund is up 3.3 per cent so far this year, according to Hedge Fund Research, with the typical equity fund up 4.2 per cent.

Mr Paulson has also suffered in part from his conviction that inflation will ultimately increase the demand for gold as an alternative to paper currencies. He is the largest holder of GLD, the gold-backed exchange traded fund, and offers his investors the opportunity to denominate their holdings in the precious metal.

While the gold share class for almost all of his funds is in positive territory for the year, reflecting slight gains for the metal this year, the dedicated gold fund is down 6.3 per cent after losing 13.4 per cent in March. The losses are largely due to holding of stakes in gold mining companies such as AngloGold Ashanti, which have fallen this year. Significant positions in the gold miners are also held in the Advantage fund, according to a person familiar with the situation.

However, a return of merger and acquisition activity has boosted the performance of Mr Paulson’s oldest fund, Paulson Partners, where he began his investing career making bets on the outcome of corporate takeovers.

Paulson Partners is up 6.6 per cent so far this year, and the enhanced version that uses leverage is up 13.3 per cent. The gold share class of the same fund is up 15 per cent, putting it above its high water mark, the point at which a hedge fund manager is able to charge performance fees.

Mr Paulson’s Recovery fund, a relatively small fund that slumped 28 per cent last year, according to a person familiar with the numbers, has gained 9.3 per cent this year.

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