Paulson Sells Big Bank of America Stake

BOSTON ( TheStreet) -- Hedge fund manager John Paulson earned a record profit last year for his prescient bets on banks. A sharp decline in at least one of those financial stocks, though, appeared to be too much for the $38 billion Paulson & Co. founder as he scrambles to reverse losses in his flagship fund.

Paulson sold a "substantial portion" of his fund's stake in Bank of America ( BAC) over the past two months without giving exact figures, according to a report Thursday by CNBC, citing people familiar with its position. As of March 31, Paulson owned 123.6 million shares of Bank of America, making it his sixth-largest position with a market value of $1.65 billion.
John Paulson (Paulson & Co.)

While Paulson benefited substantially on his bank-stock bets following the market's rebound from the March 2009 low, he has been paring positions in financial companies. In the first quarter, Paulson sold 80,000 shares of Citigroup ( C), 2 million shares of CIT Group ( CIT) and 226,000 shares of Bank of America.

>>View John Paulson's Portfolio

Investors in Paulson's fund may not be happy to learn the fund manager sold shares of Bank of America before the company announced an $8.5 billion settlement with holders of mortgage securities related to its Countrywide unit, as the bank's stock rose 3% on the announcement Wednesday. However, headed into this week, shares of Bank of America were down more than 20% this year. The CNBC report suggested Paulson may consider buying shares following the bank's settlement announcement, according to the same people familiar with the sale.

Perhaps more embarrassing is Paulson's loss on Sino-Forest, a Chinese tree-plantation owner that trades on the Canadian stock exchange. Muddy Waters, a research firm that also takes short positions in stocks it reports on, alleged in a report earlier this month that Sino-Forest overstated its timber holdings. Shares of the company are down nearly 90% this year.

The rapid drop in share price following the Muddy Waters report cost Paulson $107 million, according to several media reports that cite a letter to investors. Paulson dumped his stake in Sino-Forest earlier this month.

Through June 10, Paulson's flagship Advantage Fund Plus had fallen almost 20% this year, according to a report by The Wall Street Journal that cited two investors briefed on the fund's performance. Over the same period, Paulson's Enhanced Partners fund had risen less than 4%, the report added, putting it on par with the gain on the S&P 500.

-- Written by Robert Holmes in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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