Morgan Stanley Brokerage Dumps Two Paulson Funds

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Morgan Stanley Wealth Management has become the second major brokerage to drop hedge fund manager John Paulson's Advantage and Advantage Plus Funds from their retail offerings, CNBC has learned.

The move was not expected. Back in May, Morgan Stanley put the funds on "watch" because of their poor performance. In an email sent to the unit's financial advisers on Tuesday, it changed the status of the funds to "redeem" from "watch," telling clients they should redeem their holdings in the funds.

Morgan Stanley cited the poor performance of the funds as the reason behind its decision. (Read More: John Paulson's Hedge Funds Weather Another Tough Month)

The Advantage and Advantage Plus Funds are umbrella portfolios that employ all of Paulson's various investing strategies. While he made billions betting against the housing market, Paulson's venture into gold has been far less successful. The weak performance of this strategy has been a big drag on the Advantage Funds.

(Read More: Despite Sweet Deal, 92nd Street Y Redeems Paulson Money)

Paulson's firm declined comment. A person familiar with the funds said assets in the two funds held by Morgan Stanley's brokerage clients totaled around $100 million. The two funds managed a combined $5.7 billion as of Nov. 1, 2012. The source said other Paulson funds continue to be offered by Morgan Stanley Wealth Management.

Citigroup's Smith Barney brokerage unit dropped the funds back in August. Morgan Stanley Wealth Management is on track to buy the 27 percent of Smith Barney it does not already own by June, 2015. (Read More: Paulson Fund Losses Prompt Some Investors to Pull Out)

Morgan Stanley declined to comment.

—By CNBC's Mary Thompson; Follow her on Twitter: @MThompsonCNBC