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Fund Lessons From John Paulson

The legendary investor has prospered by making daring bets in real estate and technology.
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NEW YORK (

TheStreet

) -- The gut-wrenching losses during the market tumble have been felt by the savviest financiers of Wall Street, including Warren Buffet who has lost nearly $10 billion of his personal fortune.

While the losses were plentiful, some of the most daring investors were actually able to turn profit during the mess. By betting against real estate when everyone else remained optimistic, hedge fund manager John Paulson was able to net $15 billion in returns. This equated to a personal profit of nearly $4 billion. His forethought during this period has gained the admiration of other famous investors such as

George Soros

.

Stockpickr Tools John Paulson's Portfolio

A native of Queens, N.Y., Paulson appears to have been destined to have great economic insight from birth. His maternal grandfather, Arthur Boklan, a Wall Street banker during the 1929 crash, was able to remain prosperous during the Great Depression even as the rest of the nation suffered. Paulson's father was CFO of Ruder & Finn.

After high school, Paulson attended New York University where he graduated valedictorian of his class in 1978. Upon graduation, he immediately moved on to the Harvard Business School where he graduated as a Bakers Scholar,.

Paulson headed to Wall Street, where he jumped from firm to firm. His resume includes big names such as Bear Stearns, where he worked on their mergers and acquisitions team and Gruss & Co. where he was employed as a mergers arbitrageur.

In 1994 with $2 million of his own money, Paulson started his own hedge fund company. Though $2 million in assets is considered meager for a hedge fund, Paulson was able to use his careful investing choices to build an attractive track record. During the tech bubble that burned many, Paulson gained popularity by shorting firms, betting on mergers, and most notably, not losing his clients any cash. From 1999 to 2003 he saw his assets under management balloon to $600 million.

Although his success during the tech bubble strengthened Paulson's reputation within the hedge fund community, his bet on the housing market is what has put him on the map.

In 2005, while looking for the next bubble to play after tech, Paulson and his analysts were turned onto the housing market. During this time, optimism was in strong supply with mortgage companies boasting that housing prices could never fall. Believing the hype, investors pooled into collateralized debt obligations.

While the CDOs were ballooning, the prices of instruments designed as insurance policies against default called credit-default swaps were unusually low. Paulson, who was interested in finding a way to play what he perceived to be the market's inevitable downfall, saw these instruments as an ample opportunity. He began pouring his funds into CDSs while shorting CDOs.

His bet lost money in the beginning but eventually worked out handsomely. In 2007, when many were watching their nest eggs deteriorate before their eyes, Paulson was rolling in returns. His fund jumped 600% netting staggering returns.

In late 2008, the financier set up the Paulson Recovery Fund to invest in the same financial institutions that faltered during the subprime crisis, including

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JPMorgan

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Paulson also has taken steps to help struggling homeowners in the sublime mortagage crisis. In 2009, he made a $15 million donation to the Center for Responsible Lending to support programs designed to help homeowners avoid foreclosure.

Today, Paulson remains at the helm and continues to make bold investments in companies. Most recently, the financier placed a $78 million bet on the struggling insurer,

Conesco

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. It will be interesting to see if the investor's foresight once again proves profitable.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion did not have positions in any equities mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.