Paulson Shorts Euro Sovereign Bonds, Bets on Credit Default Swaps

PAULSON & COIn a bid to reverse losses stemming from poorly timed bets and overcorrection last year, hedge fund manager John Paulson is shorting European sovereign bonds, reports Bloomberg Businessweek.”He is also buying credit-default swaps on European debt, or protection against the chance of default… Spanish banks are of particular concern as their holdings of the country’s debt and client withdrawals make them overly dependent on European Central Bank financing.”

Paulson’s firm, Paulson & Co., was hit hard last year. His Advantage Plus fund finished the year down 52.5%, and his other funds didn’t do much better. Paulson’s unleveraged Advantage fund fell 36%, his Recovery fund dropped 28%, his credit fund was down 18%, the Paulson Partners fund was down 10%, and the gold fund lost 10.5% in 2011. As of the end of the first quarter 2012, Paulson was in a much beter position. His opportunities fund was up 5% at the end of March while his Advantage Plus fund (the one that had the largest losses last year was down 2%. Paulson’s Advantage fund, which uses the same strategy as the Advantage Plus fund but without leverage, was down 1%, while the dedicated gold fund was down 6.3%. The Paulson Partners fund, which was the firm’s best performing fund last year, was up 6.6%, while the version of the Partners fund that uses leverage, the Paulson Enhanced fund, was up 13.3%. Paulson’s Recovery fund was up 9.3%. The gold share class of that fund did even better, coming in at roughly 15% for the first quarter 2012. All in all, Paulson returned 14.6% in the first quarter 2012.

If Paulson is right about shorting European sovereign bonds and credit-default swaps on European debt, 2012 could be the sort of red letter year the hedge fund manager needs to get back on track. In fairness, Paulson does not have a reputation as a great stock picker but he has made a name for himself on macro-themed investments – be they his bets against subprime mortgages or or the $5 billion he made betting on gold in 2010. In other words, Paulson has a reputation for getting this type of bet right.