Paulson & Co, a leading hedge fund manager, is scaling back its bullish positions on the US economy.

After a vicious second quarter that saw its funds hit hard by a rise in market volatility, Paulson has cut its net long bets across almost all of its funds.

“A consequence of our portfolio positioning is higher short-term market correlation and volatility,” John Paulson, the company’s founder, said in a letter to investors describing his funds’ performance in the second quarter.

The move reflects increasing uncertainty over the sustainability of the US recovery.

Paulson’s Recovery funds have been among the casualties of the second quarter downdraft. The funds were down 12.6 per cent, according to the second quarter letter sent to investors.

The $3bn Paulson & Co Recovery fund, which was launched in late 2008 to take advantage of a rebound in the US housing market and economy, has decreased its net exposure from 140 per cent to 107 per cent in recent weeks, according to Mr Paulson’s letter.

Net exposure is a measure used by hedge fund managers as a gauge of their directional bias, and is calculated by subtracting total short positions from total long positions, with leverage taken into account. A net exposure of zero would imply a market-neutral portfolio with equal long and short positions.

John Paulson’s flagship Advantage fund, which manages $9bn of client money and was down 6.6 per cent for the period, has shrunk its net long exposure from 72.4 per cent to 67.3 per cent. The more specialist $4.3bn merger arbitrage funds, which make money by trading corporate names engaged in takeover talks, have scaled back from 58 per cent to 50 per cent.

“We are now at the point where further upside in the enterprise is less in the credit but rather in the equities of companies which have or will undergo restructuring, recapitalisation and bankruptcy reorganisation,” Mr Paulson told investors in his letter.

The average hedge fund lost 2.5 per cent in the second quarter, according to Hedge Fund Research.

Many managers have significantly derisked their books over the past few weeks in response to the volatility.

According to Hedge Fund Research, equity long short and event driven funds lost $32.5bn in the three months to the beginning of July.

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