Investor John Paulson: Alone at the bottom

October 13, 2011: 5:01 PM ET

The subprime mortgage crisis' big winner, hedge fund manager John Paulson, lost roughly 30% for investors in 2011.

NEW YORK (CNNMoney) -- During the recent downturn, legendary hedge fund investor John Paulson was in a class by himself, generating returns of up to 600% by betting against mortgages in 2008 as the market crashed.

Paulson is still alone, but this time he's at the bottom of the heap.

Some of Paulson's $30 billion funds have generated losses of roughly 30% after placing ill-fated bets on Bank of America (BAC, Fortune 500) and Chinese timber company Sino-Forest, which has been facing fraud allegations. Even Paulson's primary hedge, gold, has lost its luster. Gold prices sunk 11% in September.

For low performing funds like Paulson's, October could be a make or break month. That's because investors who want to pull their money out by year-end have to submit a redemption notice by either Oct. 1 or Nov. 1 to allow for the 60 or 90 day notice period.

Few funds have lost as much as Paulson's, but a smattering of multi-billion dollar hedge funds have clocked 20%-plus losses from the start of the year. One of those funds, Longacre Fund Management, is reportedly winding down its main funds after receiving significant redemption requests.

It's unclear if Paulson's outsize losses will prompt investors in his funds to remain loyal to the man that once made them huge returns. Out of Paulson's $30 billion fund, about half comes from Paulson and his employees.

And because of the unique structure of hedge funds, he'll collect 2%, or $450 million, for managing those assets, despite generating losses.

Paulson's primary fund, the advantage fund generated losses of 33.71% in 2011 as of October 7, 2011, according to data from Lyxor, Societe General's managed account platform.

Lyxor feeds $11.7 billion from investors into 100 hedge funds through its managed accounts platform but does not provide performance data since the accounts are private.

Paulson has taken steps to quell the damage by laying out a plan to generate positive returns, during a conference call Wednesday. But it remains to be seen if that will be enough to keep his investors happy.

A spokesperson for Paulson declined to comment.

Big hedge funds are getting slaughtered

As of Oct. 7, only 25 of Lyxor managed funds had generated positive returns, according to documents obtained by CNNMoney. Thirty funds lost more than 10% and nine funds, including Paulson's flagship Advantage fund, generated losses of more than 20%.

That's worse than the S&P 500, which is only down about 8% from the start of the year.

Most of the funds with steep losses aren't as well known as Paulson's but several large names fall into the sub-10% performance category. Among them: Lyxor funds managed by Canyon Capital, Apollo Global Management (APO), Longacre Fund Management and FX Concepts -- the world's largest currency trader.

Canyon, Apollo, and Marathon declined to comment. Longacre and FX Concepts did not return calls.

Investors and individuals close to these funds said that accounts on Lyxor don't always exactly track the performance of a hedge funds' actively managed accounts.

Lyxor allows investors to move money in and out every week. Most hedge funds, by contrast, only allow investors to take money out each quarter with 60 or 90 days notice. For that reason, hedge funds often manage Lyxor funds differently.

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Canyon Capital is a $19 billion Los Angeles hedge fund run by two proteges of Michael Milken. On Lyxor's platform, the firm's Canyon Capital Arbitrage Fund had dropped 11% as of Oct. 7.

A source close to the firm said that the Lyxor fund accounts for less than 1% of its total assets. Its flagship Canyon value realization fund was down closer to 6%.

Apollo oversees $73 billion of assets, of which roughly $2.6 billion are hedge funds. The Lyxor account is only a small fraction of that total. Even so, the Lyxor-managed Apollo Distressed Fund lost nearly 21% as of Oct. 7.

Currency trading firm FX Concepts dropped 15%, and Longacre shed 21%.

In 2008, underperforming hedge funds were beset with redemption requests from skittish investors. So far, 2011 looks nothing like that, said Marjorie Asfour, managing director at Cambridge Associates, which offers investment advice to pensions and endowments. Asfour said that some investors are requesting redemptions, but it's a much smaller number than in 2008.

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"Before 2008, hedge funds sold themselves saying they could make money in any environment," said Michael Rosen, the founder of Angeles Investment Advisors, which helps pensions and endowments invest $40 billion in hedge funds and other vehicles. "We don't think in those terms anymore."

Several of Rosen's clients work with Canyon Capital, and said he doesn't expect any redemption requests.

Like Rosen, many investors appear willing to cut hedge funds some slack in an environment where nearly all investments have taken a beating in 2011. To top of page

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