Morgan Stanley advises pulling money from Paulson funds

BOSTON Wed Dec 19, 2012 5:55pm EST

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BOSTON (Reuters) - Billionaire hedge fund manager John Paulson has gotten another dose of bad news.

Morgan Stanley Smith Barney is recommending that its financial advisers pull client money out of Paulson's Advantage and Advantage Plus funds, a person familiar with the matter said on Wednesday.

Morgan Stanley had been watching Paulson's performance for months and prepared for this move when it told advisers last spring to stop putting new money into those funds, advisers with the firm have said.

Since then losses at the Advantage funds have deepened to double digits, and now the company is recommending, but not requiring, that its advisers tell their wealthy clients it is time to turn their backs on the 57-year-old Paulson.

Morgan Stanley declined to comment.

The move, which is expected to shave some $100 million in assets off the $5.7 billion Advantage and Advantage Plus funds, may be more humiliating than truly harmful for Paulson's $20 billion firm. Paulson, who makes his money betting on events such as mergers and spinoffs, became a market darling after earning billions by betting against the overheated housing market in 2007. He then won big again with his bet on gold.

People familiar with Paulson's firm said that expected inflows should easily offset the decline next year.

Additionally, Morgan Stanley Smith Barney advisers are still able to put their investors' money into two other Paulson funds -- the Paulson Partners fund, which specializes in merger-arbitrage and is up about 7 percent through November, and the Credit Opportunities fund, which is up about 6 percent through November.

Investors on the Morgan Stanley platform have already asked to pull out about $36 million of the $100 million that is expected to be redeemed, the person familiar with the numbers said.

The move comes only months after Citigroup's private bank decided to withdraw $410 million. But Bank of America's Merrill Lynch unit told investors in August that it was sticking by Paulson and had no plans to exit.

Most recently, Paulson's funds were hurt when gold prices dipped. Losses in Europe, where Paulson had previously bet on a sovereign default that did not occur, also weighed on the funds.

(Reporting by Svea Herbst-Bayliss; additional reporting by Lauren Tara LaCapra; Editing by Gary Hill and Leslie Adler)

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