Hedge fund legend John Paulson apologized to investors for what he is calling a year that has been “the worst in the firm’s 17 year history.”
“We are disappointed and apologize,” the Paulson Funds said in a letter to investors obtained by CNBC.
Paulson’s funds stumbled significantly this year. The Paulson Advantage fund was down 32.57 percent for the year. The Advantage Fund Plus, a leveraged version of the Advantage fund, was down 45.35 percent. That represents a slight recovery from an earlier reported decline of 47 during the first nine months of the year.
What happened? Paulson misread the macroeconomic conditions, according to the letter, which is titled "2011 Third Quarter Report."
“At the beginning of the year, we positioned our portfolios with net equity exposure appropriate for growth in the U.S. and an orderly resolution of Europe’s sovereign credit issues. However, as the year progressed, our assumptions proved overly optimistic and our net equity exposure was too great. Growth in the U.S. slowed and Europeans leaders were, as yet, unable to deal with the escalating sovereign debt crisis,” the letter says.
The 24-page letter describes the fundamentals of the portfolio companies as “sound” and says they had “strong second quarter earnings.”
But “macro fear is the driving force behind the markets” rather than fundamentals, the letter said.
The stumble is particularly embarrassing for Paulson & Co because it has historically focused on constructing its portfolio with an eye to the overall macro-environment.
“For 17 years, we have been generally correct in these macro assessments. This year we were clearly wrong in our judgment regarding the potential for the negative conditions mentioned above to create a toxic mix of fear in the markets,” the report says. The hedge fund company is now “wholly focused” on returning investors to their high-water marks. The report says Paulson is confident that “many of our position will recover as fear subsides.”
Paulson’s other funds are also suffering. The Credit Opportunities Funds are down nearly 19 percent. The Credit Opportunities II is down 15.31 percent for the year.
Paulson’s merger funds are also down. Paulson International Ltd. is down 10.40 percent for the year. Paulson Partners LP is down 9.89 percent. Paulson Enhanced Ltd. is down 22.11 percent. Paulson Partners Enhanced is down 19.83 percent.
The Paulson “Recovery funds”, which invest in hotels, financial and real estate services companies are down more than 31 percent, compared to a better than 23 percent gain last year.
Paulson’s gold funds slightly improved this year, up just over 1 percent.
The company declined to comment.
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