Bitten by the gold bug

On a conference call with investors last month, John Paulson, whose bet against the US subprime mortgage bubble in 2007 has been called "the greatest trade ever", boasted that one of his biggest hedge funds would have been up 15 per cent this year -- if only he had not owned gold stocks.

The wishful computation of returns highlights the challenge for Paulson as he seeks to resurrect his reputation as a Wall Street icon and reverse US$9.4 billion in losses for clients in the past two years.

Paulson has done well investing in companies undergoing mergers or restructurings, a strategy where he got his start as trader. Yet his big bets on macroeconomic developments, such as his wager on gold, have undermined that performance.

Jay Rogers, president of Alpha Strategies Investment Consulting in California, which advises hedge-fund investors and managers seeking to raise money, said: "It's a bit of ego on his part: 'I made billions of dollars and did this big trade and I'm a genius.' That hubris leads him to make big bets, and unfortunately most of them have gone wrong."

Ever since Paulson made US$15 billion in 2007 for investors by predicting the tumble in the US housing market, he has stumbled from one losing macro trade to another, chipping away at gains that are still among the largest in hedge-fund history. He has been too optimistic about the US economic recovery and overly bearish about the European debt crisis. Gold, which Paulson forecast would strengthen as investors sought a hedge against inflation, instead entered a bear market this year.

Paulson & Co, once one of the world's biggest hedge funds, has seen its assets slide more than 50 per cent, from a peak of US$38 billion in 2011. Paulson's US$500 million Gold Fund, most of it the 57-year-old billionaire's own money, lost 27 per cent last month, bringing the decline this year to 47 per cent, according to two insiders.

He continues to stand by his gold wager even as the metal fell 13 per cent this year.