Recall that that hedge fund luminary John Paulson staged an eleventh hour comeback last year that saved his top funds from severe losses.

As the losses mounted in 2011, some people--including a lot of limited partners--were hoping for similar magic. If a massive rally to bring the top funds back to break even was in the cards, November would've been the month for a huge upside move. Sadly, the big comeback did not materialize. In fact, November was a big stinker for the flagship Paulson Advantage Fund, which was down 3 percent in November, bringing the losses on the year to 32 percent, according to Reuters. The leveraged Paulson Advantage Plus fund was down even more, 4 percent in November and 47 percent for the year.

It will be next to impossible for the funds to make up that kind of ground in December. It would be foolish to do anything now but de-risk. Despite the big losses, the funds' top investors have generally stayed the course. Redemption requests totaled about 8 percent of total assets, and it could've been a lot worse given the numbers.

So what to do? There will be some awkward discussions between Paulson and his investors fairly soon. It could be many years before the two flagship funds recover to their high water marks. But the bad year is not necessarily a unmitigated disaster. A limited partner that has been invested since before the financial crisis might be ahead still, though the annualized returns don't looks so hot now. We might see the firm open up so new funds at some point, giving beaten-up loyal investors favorable terms as incentives. Given the climate among pensions, we wouldn't be surprised to see heavy demand for a new Paulson fund.

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