The best known Paulson Hedge Fund is the Advantage Plus. It is primarily focused on risk arbitrage and investing in other corporate events like bankruptcies. But John Paulson is a hedge fund manager who has shown a propensity to also focus on long/short investing and taking macro bets as well, like his foray into shorting subprime credit default swaps and betting big on gold.

This hedge fund has done really well over the past few years, especially in the wake of the subprime collapse and the subsequent rebound in financials. Paulson displayed excellent timing in the subprime collapse, when he shorted credit default swaps. And he displayed even more remarkable timing when catching the rebound off the lows.

But right now his fund is off 20% from its recent high water mark after the recent declines in financials and the debacle with Sino Forrest.

Is this a temporary decline or the start of something more serious?

It’s hard to say, but the man who was instrumental in Paulson’s wager against subprime, Paolo Pellegrini, left the firm a while back to start his own fund. So Paulson may have lost one of his firm’s key players.

Pellegrini’s hedge fund, interestingly, returned all outside investor money in 2010. He said that the environment was becoming a lot more difficult and decided to focus on managing his own money for a while. Could this difficult investing environment be part of the reason for Paulson’s current draw down?

To Big To Succeed?

One factor that is unfavorable to Paulson’s Hedge Fund is the size of assets under management. It is not the biggest fund in the world but it is still very massive. It has around $37B under management and this makes it a lot less nimble than many of its smaller competitors. This makes it harder for Paulson to get into and out of positions at favorable prices, so this makes it harder and harder for him to outperform.

But, Paulson is a very smart investor, so I wouldn’t count him out just yet. He graduated first in his class from NYU; then he got an MBA from HBS. He made his first few million dollars in merger arbitrage and then he was sharp enough to predict and bet against the subprime bubble. He has made a lot of wise moves in the past, so there is a good chance that he will keep making them in the future.

But only time will tell if he can continue to keep making enough great trades to keep moving the needle upward, as his AUM grows it becomes harder and harder to outperform.