Exclusive: Paulson says bets were too aggressive

NEW YORK Thu Jul 21, 2011 3:50pm EDT

Hedge fund director John Alfred Paulson, president of Paulson & Co Inc, testifies before a US House Oversight and Government Reform Committee hearing on the regulation of hedge funds, on Capitol Hill in Washington, November 13, 2008. REUTERS/Jonathan Ernst

Hedge fund director John Alfred Paulson, president of Paulson & Co Inc, testifies before a US House Oversight and Government Reform Committee hearing on the regulation of hedge funds, on Capitol Hill in Washington, November 13, 2008.

Credit: Reuters/Jonathan Ernst

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NEW YORK (Reuters) - A humbled John Paulson told investors on Thursday he was "too aggressive" with some of the stock bets in his flagship funds and he is trimming back some of his riskiest holdings.

The hedge fund manager told clients in a conference call that he was dialing back the risk by moving away from bank holdings with heavy mortgage exposure.

The investor call came after a tumultuous first half of the year for Paulson, whose flagship Paulson Advantage fund lost about 12 percent. A related fund called Advantage Plus was off 18 percent.

He told investors that in the wake of the Advantage funds' hefty losses on Sino Forest, a Chinese lumber and forestry company, he intends to beef up his Asian research team. Paulson did not point fingers at anyone for the Sino Forest debacle. But the manager said his 120-person firm needs to know the region better before it takes new bets.

"We'll have to strengthen our research capabilities there," Paulson said on the conference call for investors which Reuters heard portions of.

The billionaire trader said on the call that investing with him would never be free from turbulence, but he said that global economic factors have made this year's ride bumpier than he is willing to stomach.

Europe's debt crisis, fears about new financial market regulation and a slow U.S. economic recovery created problems for the New York-based firm, said Paulson, one of the world's most closely watched investors.

But some of the losses, like Sino Forest, were of his own making. During the call, he took about 100 minutes to explain to investors his missteps and how he was reshaping the portfolio in response the funds' poor performance this year.

The timing of the call was critical because it came as large institutional investors like state pension funds and wealthy private investors have only a few weeks left to put in a request to withdraw money from the funds. Already, some investors have told Reuters they intend to put in redemptions by the middle of August.

TALK OF THE TOWN

Until this year, Paulson was the toast of the $2 trillion hedge fund world after his big gamble on the collapse of the U.S. housing market made him a billionaire many times over. Paulson now says that his timing may be off on his bet that U.S. economy is poised for a strong rebound.

Paulson conceded that his research analysts were hearing rumblings about problems at Sino Forest for months and that his trading desk received requests to borrow the stock to short it. Indeed Paulson was trimming the position when the Muddy Waters research report alleging account problems hit.

"I should have been more receptive to this information," Paulson said.

LESS LONG

The Advantage Funds oversee roughly $18 billion in assets, a big portion of Paulson & Co's roughly $38 billion in assets.

Paulson said he cut the net long exposure from roughly 81 percent to about 60 percent, and plans to cut it more. "Eighty-one percent was way too high. We cannot operate the fund at that level," he said. "I'd like to bring the risk down further to about 50 percent."

As a long-time owner of large financial companies such as Bank of America (BAC.N) and Citigroup (C.N), Paulson said the former -- his sixth largest position at the end of the first quarter -- was "somewhat of a disappointment."

He said his analysts did not expect the magnitude of the mortgage problems to be so great.

To reposition the portfolio, Paulson said he diversified into financial companies with less exposure to mortgage loans, noting that he liked Capital One (COF.N) and Wells Fargo (WFC.N), two names he owned at the end of the first quarter.

He also said he increased his bet that the euro currency would fall as a hedge against further fallout from Europe's debt crisis.

(Editing by Matthew Goldstein and Robert MacMillan)

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