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John Paulson’s Returns Are Misunderstood

Over the past week we came across several articles and comments that didn’t really understand John Paulson‘s 2011 returns. A majority of articles were claiming that Paulson lost 6% in May. Paulson’s flagship fund is called Paulson Advantage and it fell 4.06% in May. Paulson Advantage is also down 5.26% as of May 31st.

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Paulson also has a leveraged version of his flagship fund and it is called Advantage Plus. Its return is usually around 150% of Paulson Advantage’s return. In 2010, Paulson Advantage Ltd. returned 10.96% whereas Paulson Advantage Ltd. Plus returned 17.09%. In May of this year, Paulson’s Advantage Plus fund lost 5.93% (approxiamtely 150% of -4.06%).  Advantage Plus fund also lost 7.54% through May.

So, Paulson’s flagship fund and its leveraged version are in the red this year. Does this mean that Paulson is in the red for the year as well? Well, these aren’t the only funds Paulson manages. Here are the returns for Paulson’s other funds (source: Dealbook):

Paulson Partners: Up .08 percent for May and up 6.64 percent Year-to-Date
Paulson Partners Enhanced: Down 0.2 percent and up 11.5 percent
Paulson Advantage: Down 4.06 percent and down 5.26 percent
Paulson Advantage Plus: Down 5.93 percent and down 7.54 percent
Paulson Credit: Down .05 percent and up 7.94 percent
Paulson Gold: Down 6.39 percent and up 0.79 pecent
Paulson Recovery: Down 0.69 percent and up 5.03 percent

As you can see Paulson’s other funds had positive YTD returns. But that’s not the end of the story. Paulson doesn’t  really invest his money in his flagship fund or its leveraged version. Paulson invests majority of his wealth in the “gold denominated” versions of his funds. That’s how he earned $5 Billion in 2010. For example Paulson Advantage fund’s gold denominated version returned 32.5% in 2010, vs. 10.96% for the “regular” fund. Considering that gold is up so far this year, it is highly likely that John Paulson made hundreds of millions of dollars despite the losses in his flagship fund and its leveraged version.