Hedge fund that anticipated the housing collapse sees $3bn Recovery Fund, set up to benefit from strong economic bounceback, lose 9% of its value

Misplaced optimism by US hedge fund manager John Paulson about the ability of the US to bounce back from recession is costing his wealthy investors dearly, it emerged today.

Amid fears on Wall Street about the faltering recovery in the world’s biggest economy, Paulson & Co saw its funds suffer heavy losses last month.

Reuters reported that Paulson & Co’s flagship Advantage Plus fund lost more than 4% of its value in August. This followed a drop of 6.6% in the second quarter. The company’s $3bn Recovery Fund, launched at the depth of the global downturn in late 2008 in anticipation of a rapid and strong recovery in the US, performed even worse, losing more than 9% in August.

Paulson was one of the few hedge fund managers to anticipate the depth and duration of the crash in American real estate markets. In 2007, when Wall Street was betting heavily on the continued strength of house prices, his Credit Opportunities Fund correctly anticipated the bursting of the sub-prime mortgage bubble.

But his investors have suffered this year after the expiry of federal government tax breaks for home buyers in the spring triggered a double-dip recession in property, with knock-on effects on jobs, growth and the stock market.

Other hedge funds have also struggled, with returns in the sector so far this year averaging just 1.29%.

Losses caused by America’s weaker-than-expected economic recovery have been partly offset by Paulson & Co’s defensive bet on rising gold prices. The metal was trading at a record high of just under $1,260 an ounce today amid concerns that problems in the US would spread to the rest of the world. Paulson & Co’s gold fund was up by 9% last month, Reuters reported.