Goldman Says Hedge Funds Pare Gold Stakes

BOSTON (TheStreet) -- John Paulson's hedge fund generated a record $5 billion profit last year thanks to timely bets on gold.

Paulson is still a bullion bull, but some of his peers are moving on to other sectors. Gold stocks and exchange trased funds represent 2.2% of the average hedge fund long portfolio, down from 2.9% in the second quarter of 2010, according to Goldman Sachs'(GS) fourth-quarter Hedge Fund Trend Monitor, which dissects 699 hedge funds with $808 billion of long stock-specific and ETF equity assets. Excluding gold-related ETFs, gold stocks accounted for 1.5% of the average single-stock long portfolio, down from 1.8% in the quarter ended June 30.

Hedge funds are worried over the prospects of rising inflation and have devoted $23 billion to long positions in gold stocks and ETFs. About $8.6 billion of that exposure, or 38%, is in the form of the SPDR Gold Trust ETF, according to estimates from Goldman analysts. Newmont Mining(NEM) is a stock favorite.

Goldman analysts limit the hedge fund universe to funds with 10 to 200 distinct equity positions. Goldman assembled its so-called hedge fund VIP list as an easy way for investors to "follow the smart money" based on the 13-F filings. That basket of 50 stocks, which now includes three companies with exposure to gold as of Dec. 31, outperformed the S&P 500 in 2009 (40% to 27%) and 2010 (19% to 15%). The VIP list has a return of 6.3% so far this year as of Feb. 18, outpacing the 5.8% increase on the S&P 500 over the same period.

Vote: Where will gold prices finish in 2011?

Most bets on gold didn't pay off during the first month of the year, as the SPDR Gold Trust fell more than 6%. Since then, gold prices have been on a straight line upward, and the ETF has tagged along. Last week, gold rallied 2.3% to a high of $1,418 an ounce.

In total, hedge funds ended the fourth quarter with an aggregate of $13 billion in common stock long holdings and $10 billion in ETFs. On the following pages, TheStreet highlights the largest gold-related common stock and ETF holdings and looks at which fund managers were making big purchases.