Paulson's flagship fund down 21.6%

This year sentiment towards shares in financial institutions has reversed amid doubts about the strength of economic recovery, weighing on performance. Mr Paulson also suffered a loss of more than $500m in his flagship funds on a stake in Sino-Forest, a Chinese forestry company fighting allegations of fraud.

Assets in the two funds have fallen to less than $16bn, from $19bn in March. Paulson & Co has about $35bn under management.

Mitigating the losses was a rise in the gold price in July. About 40 per cent of Paulson & Co investors have chosen to denominate their holdings in gold, rather than dollars. Paulson's merger arbitrage fund is up 2.4 per cent in dollar terms this year, but the gold share class is the hedge fund's best performer, up 14.7 per cent.