In Speaking Out, John Paulson Decides the Best Defense Is a Good Offense

John Paulson has been on something of a publicity tour lately. Over the past few months, the eponymous founder of Paulson & Co., the big New York-based hedge fund firm, has been a headline speaker at two of the industry?s most high-profile conferences.

Paulson has not been this visible since 2008, the year after he made his remarkable bet, lionized in the book 'The Greatest Trade Ever,' on the collapse of the U.S. housing market. This time, however, the circumstances are rather different. After a particularly rough patch that has seen Paulson suffer significant losses and outflows, the 57-year-old manager has good reason to attempt to justify his record.

In mid-2011, at the height of his success, Paulson had $38 billion in assets under management. Today, after a period in which developed equity markets have rallied sharply, that number is down to $18 billion. Paulson has experienced some high-profile losses, notably a big bet on gold, which has soured as gold prices have collapsed by nearly a third over the past ten months. On the bright side, the firm has had some recent successes, which the fund manager wants to highlight. For investors in Paulson's flagship fund, however, the good bets have not been enough to outweigh the bad.

In 2009, concerned about inflation and predicting a weakening dollar, Paulson initiated a bet on gold. In 2010, he launched a gold fund. That fund has not been a success, which Paulson acknowledged in an interview at亚博赞助欧冠and CNBC's Delivering Alpha conference in New York earlier this month.(Read more:Latest from Third Annual Delivering Alpha Conference)

"We get a lot of attention from the gold fund, which is down because gold is down. But the gold fund is only 2 percent of our assets," he told his questioner, CNBC's Carl Quintanilla. Unstated was the fact that the gold fund was down a massive 65 percent for the first six months of 2013. The firm's other funds were all "very profitable," he added, saying, "We returned so far this year ranging between 5 percent and 32 percent." Paulson made similar remarks in May when he spoke at the annual SkyBridge Alternatives (SALT) Conference of hedge fund managers and service providers in Las Vegas.

In fact, the flagship Paulson Advantage fund, which along with its leveraged version, Paulson Advantage Plus, make up about $3.7 billion of the firm's overall assets, is up only 1.17 percent through the first six months of this year, according to data from the private bank HSBC. That trailed the average hedge fund's gain of 3.55 percent for the period, as calculated by the HFRI Fund Weighted Composite Index. An investor who put $100 million in Paulson Advantage, an event-driven fund meant to bring together the best ideas from all of the firm's portfolios, on January 1, 2008 would have approximately $87 million today. Although the fund made money in 2008, 2009 and 2010, it was down 35.96 percent in 2011 and lost a further 14.23 percent in 2012.

The Paulson Gold Fund is a small part of Paulson's firm with only $300 million in assets, most of which is Paulson's own money. It is not the only way Paulson, or his investors, have exposure to gold, though. In 2009, Paulson began issuing share classes in all of his major funds denominated in gold, as opposed to dollars. He told investors he was changing his own Paulson holdings into the gold share class and encouraged them to do the same. Although the gold share class outperformed the dollar-denominated share class for the first few years, it too has suffered as the value of gold has fallen. Paulson Advantage has additional exposure to gold through an investment of more than $1 billion in gold-mining stocks, according to one investor in the fund.

The shares have been a drag on Paulson Advantage's recent performance. According to SEC filings, Paulson & Co. had positions in at least eight gold or copper mining companies as of the first quarter of this year. The largest U.S.-listed position is a $665 million investment in AngloGold Ashanti. The value of the Johannesburg, South Africa mining company has halved in the past 12 months and now trades at about $15. Paulson also has a $3 billion-plus investment in a gold ETF, Spider Gold, shares of which are down 25.74 percent year to date.

Paulson spent most of his Delivering Alpha interview focusing on another part of his firm's holdings, in real estate. In 2009, Paulson & Co. raised close to $300 million for a private equity real estate fund. Paulson Real Estate Recovery Fund I and a second $330 million real estate fund, raised in 2012, are run by former Lehman Brothers managing director Michael Barr. By the end of 2012, that first fund had, on paper, more than doubled its assets. The funds have invested heavily in land. As Paulson said at Delivering Alpha: "We focused our fund on Arizona, California, Nevada, Colorado and Florida. And between those states, I think we were probably the largest purchaser of entitled lots," land that is zoned for construction, mostly developed in the recession. "And now that the housing markets are starting to improve, the valuation of this real estate is starting to increase."

The real estate bet has produced some successes. Paulson was one of the key investors in the property management company Realogy Holdings Corp., which went public in October 2011 at $27 a share and now trades at or near $50. But a home run in his land holdings will do nothing for investors in Paulson Advantage since these highly illiquid positions are only in the separate private equity funds. It is also still a highly speculative bet dependent on demand for new houses in areas of the country that were hardest hit by the subprime crisis.

Paulson started his hedge fund firm in 1994. For most of his career, he specialized in merger arbitrage. In his remarks at Delivering Alpha, he was keen to stress his long-term track record. The firm, he pointed out, had only two down years, 1998 and 2011. Prior to 2007, as a merger arbitrager, he had a record of hitting singles and doubles, which is what merger arbitragers are meant to do. The problem for Paulson's investors is that, while the firm does still have two merger arbitrage funds managing collectively about $5.7 billion, the merger arbitrage market is not big enough to sustain an $18 billion hedge fund. (At the start of 2007, before the subprime trade paid off, Paulson & Co. had $6.3 billion in assets and ranked at No. 69 on亚博赞助欧冠机构投资者list ofthe world's largest hedge funds.)

By 2011 Paulson & Co. was the third-largest hedge fund firm in the world and Paulson found himself in a position where he had to defend the size of his business. In his 2010 year-end report, he pointed out that despite being at about $30 billion, his firm had produced some of its best returns ever in 2008, 2009 and 2010. Size, he argued, actually helped the manager because it enabled the firm to be a major, influential player in areas such as restructuring. Yet size has also left Paulson having to make big thematic bets. It is true that the firm has made some very profitable investments since 2008, particularly related to the economic recovery. But because the bet that was meant to be its next big home run, gold, has not paid off, he is left pointing to a long-term track record, the first 18 years of which have only a limited bearing on much of what the firm does today.

Last year both Morgan Stanley's and Citigroup's wealth management group recommended their advisers tell clients to redeem from the Paulson Advantage funds. John Paulson has been the subject of two best-selling books written about the financial crisis. He has testified before Congress. Yet despite his high profile and reputation, his appearance at Delivering Alpha, which was televised live by CNBC, was the first time Paulson has given a TV interview. In the past he has done his presentations behind closed doors, with no press access, and his TV appearances have been limited to being spotted courtside at U.S. Open tennis games. Both CNBC and the SALT Conference offered an ideal opportunity to reach the registered advisers who were so crucial to Paulson's post-2007 asset growth.