Paulson & Co has lost more than $500m after selling its entire holding in Sino Forest, the Chinese forestry company fighting allegations of fraud.
The sale adds to the pressure on Sino Forest as it attempts to fight a series of accusations by short seller Carson Block, and represents a high-profile setback for John Paulson, Paulson & Co’s founder, as his hedge fund struggles with recent poor performance.
“Due to the uncertainty over Sino Forest’s public disclosures and financial statements, we have sold our stock and await the results of the independent committee’s investigation,” Mr Paulson said in a statement.
On Tuesday, Fitch Ratings cut Sino Forest’s long-term foreign currency issuer default rating and senior unsecured debt rating to BB- from BB+ and put the ratings on negative watch, attributing the move to the fact that the company did not have direct access to the profits of its main operating subsidiaries.
Paulson & Co was the largest shareholder in Sino Forest when Muddy Waters, Mr Block’s research firm, published a report on June 2 accusing the group of overstating its ownership of forestry assets in China.
The company has denied the allegations and appointed an independent committee to examine the report.
PwC, the accountancy firm employed by the committee, is expected to report in two to three months.
Since the report was published, shares in Sino Forest have fallen by more than 80 per cent. At the end of October, Paulson & Co held 14 per cent of Sino Forest, which had a market capitalisation of more than C$6bn (£3.8bn) this year.
Paulson & Co saw the value of its flagship fund drop close to 6 per cent in May, echoing losses across the industry.
The $37bn New York-based money manager is famed for the spectacular returns gained by shorting the US mortgage market in 2007, but its recent reversals will again raise questions over the volatility of its portfolio.
Mr Paulson has maintained his bullish view on the US economy and equity markets, even though many of his peers have recently begun to lower their market exposure levels.
Before Sino Forest shares plunged in June, the $9bn Paulson & Co Advantage Plus fund was already down 7.6 per cent for the year at the end of May.
The average hedge fund lost 1.39 per cent in May, according to preliminary data from Hedge Fund Research, with “event-driven” strategies such as that operated by Paulson & Co’s main fund down on average 0.62 per cent.
May was also a painful month for Mr Paulson’s other big investment call – gold.
The Paulson & Co Gold fund dropped 6.39 per cent in May, erasing much of its 8.5 per cent April gain.
The fund is up 0.9 per cent in the year. Paulson & Co is the world’s largest non-sovereign gold investor.
Performance was better for the firm’s other funds. Its Credit fund was down 0.05 per cent for May, while the Recovery fund, which is geared to the prospects of the US economy, dropped 0.69 per cent.
Paulson & Co declined to comment.
In the firm’s most recent correspondence with investors, Mr Paulson said difficulties for US banks had been a particular drag on his portfolios but that he remained optimistic.