* Paulson had tried to protect against sovereign default in Europe
* Said facts have changed in Europe
By Svea Herbst-Bayliss
BOSTON, Dec 5 (Reuters) - Billionaire hedge fund manager John Paulson told clients on Tuesday evening that his funds lost money this year when bets that Europe's debt crisis would worsen failed to pay off, two people familiar with the meeting said on Wednesday.
But Paulson, one of the world's biggest managers with roughly $20 billion in assets, also sounded a slightly more optimistic note for 2013, saying early signs point to an improvement in the housing market.
The 56-year old manager had invited hundreds of investors to hear him discuss his macroeconomic views and his portfolios at Jazz at Lincoln Center in Manhattan. Bloomberg first reported the news of the client meeting.
Earlier in 2012 Paulson had expressed concern about Europe and tried to protect against a sovereign default.
But he acknowledged that the facts have now changed. Europe's new central bank governor, Mario Draghi, showed a strong commitment to the region and to the common currency which hurt his initial thesis.
Paulson's moves have been closely watched by the investment world ever since he earned billions in 2007 thanks to successful bets against the housing market.
In the last months Paulson has moved the portfolio away from Europe and is now concentrating on bets elsewhere.
The firm specializes in so-called event arbitrage and makes money through mergers, bankruptcies, spin-offs or other similar events.
This year, like last year, however, some of Paulson's strategies have made negative headlines with additional losses. At the end of October the Advantage Plus fund was off 17 percent after having lost 50 percent in 2011. Last year Paulson was criticized for having been too optimistic about an economic recovery after bets on Bank of America and Chinese forestry company Sino Forest helped contribute to heavy losses in the Advantage Funds.
Paulson is expected to tell investors how his funds fared in November in the next days. He did not discuss performance at Tuesday's meeting.
While the Advantage funds, which make up about $6 billion in assets, were underperforming again this year, other funds at the New York-based Paulson & Co are faring better.
The credit funds, now the firm's largest strategy with more than $6 billion in assets, were up for the year at the end of October.
At the start of the year Paulson promised investors to work for free as he sought to improve performance.
Investors had until Oct. 31 to say if they wanted to pull money out of the Advantage funds by year's end. A person familiar with the portfolio said that redemptions were running below their historical average and that conversations with large investors around the world are likely to lead to inflows in the new year.
Paulson has long been popular with wealthy U.S. investors, who can get a piece of the fund through Bank of America's Merrill Lynch unit and UBS and other bank's platforms. But the firm is also eager to diversify its client base around the world.
Paulson also spoke about the firm of 120 people, which is known in the industry for its relatively low turnover. He said a handful of people have left but that he also hired more than a handful of people, including at least one from Soros Fund Management, to concentrate on energy, technology and distressed investing.