John Paulson Apologizes to Investors for Dreadful Year

In a letter to investors obtained by CNBC, hedge fund legend John Paulson apologized for his fund's poor performance in 2011, which he characterized as "the worst in the firm's 17 year history." Indeed, it has been a dreadful year for Paulson & Co., with the Paulson Advantage fund losing 32.57% and the Advantage Plus Fund, which uses leverage, down 45.35% thus far. According to the letter, Paulson misread the pervasive macroeconomic conditions and was too bullish on a robust recovery. “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 manager added that right now, "macro fear is the driving force behind the markets" rather than investment fundamentals. The letter, titled "2011 Third Quarter Report" adds “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." It does not appear as if Paulson is prepared to fully throw in the towel with regard to some of his underwater positions, many of them in financial companies. The report states that Paulson is confident that "many of our positions will recover as fear subsides." While the firm's flagship Advantage funds have been particularly hard hit, Paulson & Co. has racked up losses in other funds as well. CNBC reports that the firm's Credit Opportunities Funds fell nearly 19% and that Credit Opportunities II is down 15.31% in 2011. The Paulson International Ltd. fund has lost 10.40% in 2011 and Paulson Partners LP has lost 9.89% on the year. In addition, Paulson Enhanced Ltd. has fallen 22.11% and the Paulson Partners Enhanced Fund has lost 19.83%. The firm also manages "Recovery funds" which seek to profit on a recovery in the U.S. economy from the 2008 credit crisis. Those funds are down more than 31% according to CNBC. The one relative bright spot at the firm has been Paulson's gold funds which are up a little more than 1 percent in 2011.