August 24, 2012 (TSR) – The blows keep coming for multi-billionaire hedge fund manager John Paulson, with Citi Private Bank deciding it will withdraw $410 million from his Paulson & Co hedge fund, according to sources.

Citi, reportedly discussed its plan to withdraw from Paulson’s fund on a Thursday morning call with its private bank advisers, said one of the people familiar with the decision, but who was not on the call.
Citi will redeem from the flagship Advantage portfolios, which have recorded double-digit losses so far this year, as well as the Merger and Recovery funds, which have made gains in 2012.
The private bank invests around $2bn in 60 hedge funds on behalf of high-networth clients, is said to have put Paulson on its “watch list”after the group sustained heavy losses last year.
The Citi withdrawal will further erode Paulson & Co hedge fund‘s total asset base at which has reportedly shrunk to $19.5bn from $36bn last year.

The Advantage Plus fund sank 18 percent through the end of last month, and the Advantage fund declined 13 percent over the same period.

Hedge funds gained 2.88 percent on average through July 31, according to hedge fund tracking firm HFR, while the broader stock market rose 7.41 percent over the same period.

The redemption was first reported by Bloomberg. The sources who spoke to Reuters requested anonymity because they were not authorized to speak publicly on the details of the redemption.

As returns faltered earlier in 2012, Citi put the Paulson hedge funds on a so-called watch list, a source said. It was not the only bank platform invested with the $19.5 billion fund that showed signs of cold feet.

The brokerage arm of Morgan Stanley also placed Paulson on a “watch list” early in the second quarter, instructing clients to avoid putting new money with him.

Paulson’s New York-based hedge fund is one of the $2 trillion hedge fund industry’s most closely followed names. He rose to prominence after incredibly lucrative and successful bets on the Goldman Sachs sub-prime mortgages would collapse and in gold. He earned $20 billion of profits between 2007 and early 2009 wagering against the U.S. housing market and financial companies, and then launched a hedge fund dedicated to buying up shares of gold miners and other bullion-related investments.

In 2010 he reportedly earned $5bn in one year– $4bn from investing in his own funds and $1bn in pay. It was the largest amount ever earned by an individual in a single year.

But an ill-timed bet on a U.S economic recovery had disastrous consequences for the once high-flying fund. His Advantage Plus fund ended 2011 down roughly 52 percent, while the unleveraged version of that fund, the Advantage Fund, fell 36 percent. Paulson took a heavy hit on his investment in a Chinese timber company, Sino-Forest.

Paulson told investors in the beginning of this year that last year’s losses were an “aberration.” But he has struggled to right the ship in 2012, with those funds seeing more double-digit losses this year. Other portfolios of Paulson’s have performed better, however, with the Paulson Recovery Fund gaining 3.9 percent in the first seven months of the year, and the merger arbitrage fund rising 5.4 percent over the same period.

In the first quarter, New Mexico’s $11.9 billion state pension fund withdrew its $40 million investment from the hedge fund. Joelle Mevi, the state’s chief investment officer, told Reuters that the pension fund had concerns that Paulson’s fund had become too large and could not easily get in and out of positions.

Other institutional investors, like the $30 billion Missouri Public Employee Retirement System, have remained committed to Paulson & Co, despite the poor returns in the Advantage portfolios.

It is important to note that Paulson added a significant amount of gold to his already-gold heavy hedge fund portfolio — an increase of more than 25 percent in the last quarter worth some $700 million, regulatory filings show. Paulson’s largest holdings are in the SPDR Gold Trust, and Bloomberg reported that almost half of his U.S.-traded equities are now tied to bullion.

More than half of the capital in Paulson & Co belongs to its partners.

Armel Leslie, a spokesman for Paulson & Co, declined to comment on the withdrawal. Citi, a unit of Citigroup Inc, declined to comment.


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