Paulson Bucks Paulson as His Hedge Funds Score $1 Billion Gain

Paulson doesn’t smile as he says this, even though with each new calamity his bottom line grows. Paulson & Co. funds generated profits of more than $3 billion for the firm in 2007, mostly by betting the housing bubble, swollen with subprime mortgages, would burst.

As that year ended, he set his analysts poring over the balance sheets of overstretched financial institutions, including many in the U.K. “We focused on those banks with lots of mortgages,” Paulson says. “After those companies fell, we expanded our focus not just to mortgage assets, but to all credit classes.”

The payoff: Four of Paulson’s funds were among the 20 best- performing, and the 20 most profitable, hedge funds for the first nine months of 2008, according to data compiled by Bloomberg, other hedge fund research firms and investors.

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Paulson’s performance was a striking success in a disastrous 2008 for hedge funds. The industry is reeling from convulsing markets, fleeing investors and the most serious credit squeeze since the 1930s.

Through September, the average fund lost 10.8 percent, according to data compiled by Chicago-based Hedge Fund Research Inc., putting the hedge fund industry on course to record its worst returns since at least 1990, the year HFR began compiling data. October saw another 6.3 percent decline.