Bad news piles up on John Paulson

June 7, 2011 | By Jim Kim

Hedge fund kingpin John Paulson got swept up in the China reverse merger mania regarding one stock, Sino-Forest, in which he built a 14 percent stake.

Unfortunately, Muddy Waters, a Hong Kong-based research outfit, released a research report that argued the company was a fraud, and the stock lost two-thirds of its value in one week. That stuck Paulson with paper losses of more than $450 million in a single day, according to media reports. The losses mean that June is likely to be another bad month.

Unfortunately, Paulson's hedge funds had already been taking a beating. His Advantage Plus Fund was down 7.6 percent in May, compared with the average fund loss of 1.4 percent. His gold fund was down 6.4 percent, but is still up on the year just barely. Paulson faces some big challenges here. But he remains bullish on equities, except perhaps for bank stocks.

The Financial Times notes his latest missive to clients revealed that he thinks equities could rally 40 percent. Paulson is apparently also still bullish on gold, even as the likes of George Soros and other hedge fund managers pare their holdings. For Paulson, there's still time to recover, but the odds are not good that Sino-Forest will recover anytime soon. Some think he's due for a down year, after a really good run through the financial crisis.

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