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NEW YORK (

TheStreet

) -- After earning Wall Street fame by betting against subprime mortgages in the 2008 financial crisis, John Paulson has gone cold -- his financial and gold investments have lost clients billions of dollars.

But Paulson's roots in merger arbitrage -- the art of guessing which companies will be taken over -- is standing out as the biggest success for his hedge fund

Paulson & Co.

and its attempt to regain glory.

Three of Paulson's investments, a new stake in engineering specialist

Cooper Industries

( CBE) and increased positions in

Quest Software

( QSFT) and

Gaylord Entertainment

(GET)

-- the owner of the Grand Ole Opry in Nashville -- were M&A targets last quarter.

Cooper Industries was

sold

TheStreet Recommends

to

Eaton Corp.

(TN)

in May for $11.8 billion, the largest U.S.-based acquisition of 2012. Quest Software was

sold

to

Dell

(DELL) - Get Dell Technologies Inc Class C Report

just after the quarter's end for $2.4 billion. Meanwhile, Gaylord Entertainment, an oft-speculated M&A target, sold rights to operate its hotels to

Marriott

(MAR) - Get Marriott International, Inc. (MAR) Report

. In each instance, the shares soared.

In the second quarter, Paulson & Co. bought 1 million shares in Cooper Industries worth $68 million, and he raised his holdings by 47% and 60% in Gaylord Entertainment and Quest Software, respectively, according to 13F filings submitted to the

Securities and Exchange Commission

and compiled by

Bloomberg

after the market close on Tuesday.

Although disclosures on Paulson's investments are imprecise because filings don't specify when the hedge fund made the purchases, share gyrations of the three companies indicate a classic merger arbitrage. That's because in all three investment instances, the shares have gained significantly even after each company disclosed M&A activity.

The investments show that amid a poorly timed bet on financials -- highlighted by Paulson's sale of

Bank of America

(BAC) - Get Bank of America Corp Report

and

Citigroup

(C) - Get Citigroup Inc. Report

stock ahead of a 2012 rally and a $142 million-plus investment in

JPMorgan

(JPM) - Get JPMorgan Chase & Co. (JPM) Report

-- Paulson may be wise to revert to merger arbitrage, the strategy he used before he shorted the U.S. mortgage market.

In the three arbitrage investments, Paulson appears to have backed conventional M&A plays. Cooper Industries was widely considered a takeover target after Swiss engineering giant

ABB

(ABB) - Get ABB Ltd. Sponsored ADR Report

bought electrical systems specialist

Thomas & Betts

( TNB) earlier in 2012, and both Quest Software and Gaylord Entertainment were the focus of consolidation speculation within their respective cloud computing and hotels sectors.

Outside of merger arbitrage, Paulson added to his gold bet, buying nearly $600 million worth of the

SPDR Gold Trust

(GLD) - Get SPDR Gold Trust Report

fund, while he pared a leading stake in

Hartford Financial

(HIG) - Get Hartford Financial Services Group, Inc. (HIG) Report

-- an insurer he pushed to break up -- by nearly 20% to $552 million.

Meanwhile, the fund pared stakes in successful distressed investments like

Delphi Automotive

(DLPH) - Get Delphi Technologies Plc Report

and got out of financials

Capital One Financial

(COF) - Get Capital One Financial Corporation Report

and

Suntrust Bank

(STB)

.

Paulson also exited an underperforming investment in coal sector takeout candidate

Walter Energy

(WLT)

and liquidated a $500 million investment in

Anadarko Petroleum

(APC) - Get Anadarko Petroleum Corporation Report

.

The fund's M&A arbitrage success also comes as his newest foray into the world of insurance is off to a

loss-making start

.

In April, he teamed with

Validus Holdings

(VR)

on a $500 million-plus joint investment to create

PaCRe

, a Bermuda-based reinsurance company with policies underwritten by Validus and an investment portfolio managed by Paulson & Co.

So far, the venture is down sharply, as Paulson suffers from losses in many of his largest funds.

According to Validus' second-quarter results released July 26, the joint venture

lost

roughly 10% of the initial investment during the quarter.

Paulson's poor start in the reinsurance business is notable because other hedge fund managers like Daniel Loeb of

Third Point LLC

and Steven A. Cohen of

SAC Capital Advisors

have also entered the reinsurance business -- which is essentially insurance for insurers -- as they look for new ways to grow investing capital in an environment marked by investor withdrawals and weak returns.

The fund's investing struggles are well-documented. In July,

Bloomberg

reported that Paulson & Co. lost money across all of its funds during June. While roughly $50 million in new reinsurance-related losses are unlikely to make a big dent in the performance of Paulson funds, which manage $22 billion in client assets, it is an inauspicious start for the hedge fund manager who is looking for a little luck.

>>View John Paulson's Portfolio

-- Written by Antoine Gara in New York