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John Paulson will never be forgotten for hedging against the US housing market prior to the house of cards falling in on itself in 2007. Paulson was making billions as many lost everything. In 2010, he replicated the returns by placing large wagers on an economic recovery, predominantly in gold.

With Paulson reinventing the wheel of success yet again, analyzing the Wall Street wizard’s thoughts, portfolio and current activities may provide insightful investment ideas. Additionally, Paulson’s preferences may be on sale due to unprecedented market conditions. Please review the following analysis of Paulson & Co. Hedge Fund for nuggets of knowledge to improve your portfolio’s performance.

John Paulson is the founder and president of Paulson & Co., an employee-owned hedge fund headquartered in New York. He earned his bachelor's degree in finance from New York University's College of Business and Public Administration (now called NYU Leonard N. Stern School of Business), where he graduated first in his class. He earned his MBA from Harvard Business School. He began his career at Boston Consulting Group before leaving to join Odyssey Partners, working under Leon Levy. He later worked in the mergers and acquisitions group at Bear Stearns. Prior to founding his own firm, he was a partner at mergers arbitrage firm Gruss Partners LP. In 1994, he founded his own hedge fund with $2 million and two employees.

Paulson & Co. Hedge Fund Portfolio Analysis

Paulson explains his investment philosophy in a Wall Street Journal interviews as follows:

The flexibility of having long and short exposure across the capital structure allows us to optimize performance across market cycles. Our goals are capital preservation, above average returns over the long term, and low correlation to the markets.

As the market recovers from its shortfalls of the past years, Paulson is betting on strong economic growth in the recovery: “it is time to be in the stock market,” he says, and that now is not the time “to be under-invested”.

Portfolio Overview

The fund consists of 102 Stocks with a total value of $ 29.27 billion. There have been 39 recent buys. In 2010, the Paulson and Co. funds produced over $8.4 billion of gross gains. Please review the chart below for sector breakdown.

click to enlarge

Top Ten Holdings

(GLD) / (AU) / (C) / (BAC) / (APC) / (HIG) / (STI) / (CMCSA) / (COF) / (MGM)

Top Five Holdings Review

For Paulson, all that glitters is gold. 14.93% of Paulson’s holdings are in GLD alone, with approximately 22% in gold securities altogether. Paulson’s gold investments returned over 30% in 2010. Secondly, he has two large bank positions, global money center banks Citigroup and Bank of America, turn around plays from the 2008 financial crisis trading at less than book value. And finally, an energy play with Anadarko. Paulson believes we will have double digit inflation within the next three to five years. Paulson stated inflation, “is already becoming a problem in emerging economies, especially because of rising commodities prices.” Please review the following analysis of Paulson’s top five holdings, recent adds, buys, sells and closeouts.

SPDR Gold Trust

SPDR Gold Trust is an investment trust. The objective of the trust is to reflect the performance of the price of gold bullion. The Trust primarily holds gold. The sponsor of the Trust is World Gold Trust Services, LLC. BNY Mellon Asset Servicing, a division of The Bank of New York Mellon is the trustee. HSBC Bank USA, N.A. serves as the custodian.

The GLD closed Tuesday at $136.27, down $2.59, incurring a 1.87% loss for the day. GLD was recently trading as high as $140.03 on 3/11/11 prior to the recent downturn. It was trading for $110.40 a year ago, providing a gain of 27% over the last year. If you want to invest in gold, GLD is one of the purest plays.

Anglogold Ashanti Ltd.

AngloGold Ashanti Limited engages in the exploration and production of gold. The company undertakes Greenfield exploration activities in Australia, China, North and South America, the Democratic Republic of the Congo, the Middle East and North Africa (MENA), Russia, Sub-Saharan Africa, and the Southeast Asia; and Brownfields exploration activities worldwide, primarily in South Africa, Mali, Guinea, and the United States. It primarily sells gold, as well as uranium, silver, and sulphuric acid. As of December 31, 2009, AngloGold Ashanti Limited had proved and probable gold reserves of 68.3 million ounces. The company was founded in 1944 and is headquartered in Johannesburg, South Africa.

AU closed Tuesday at $46.06, down $0.98, incurring a 2.08% loss for the day. AU was recently trading as high as $49.80 on 3/2/11 prior to the recent downturn. It was trading for $37.61 a year ago, providing a gain of approximately 23% over the last year. It's well positioned to take advantage of the continuing gold bull market by recently absolving their hedges.

Citigroup

Citigroup, Inc., a global financial services company, provides consumers, corporations, governments, and institutions with a range of financial products and services, including consumer banking, credit cards, corporate and investment banking, securities brokerage, and wealth management.

C closed Tuesday at $4.44, down $0.10, incurring a 2.2% loss for the day. C was recently trading as high as $5.15 on 1/14/11 prior to the recent downturn. It was trading for $4.05 a year ago, providing a gain of approximately 10% over the last year. C is trading at less than book value.

Bank of America

Bank of America Corporation, a financial holding company, provides banking and nonbanking financial services and products to individuals, small- and middle-market businesses, large corporations, and governments in the United States and internationally.

BAC closed Tuesday at $13.96, down $0.27, incurring a 1.9% loss for the day. BAC was recently trading as high as $14.89 on 2/14/11 prior to the recent downturn. It was trading for $17.03 a year ago for a loss of approximately 18% over the last year. BAC is trading at less than book value.

Anadarko

Anadarko Petroleum Corporation is an independent oil and gas exploration and production company. The company operates in three operating segments: oil and gas exploration and production, midstream and marketing. The company owns and operates natural-gas gathering, processing, treating and transportation systems in the United States.

APC closed Tuesday at $75.87, down $1.31, incurring a 1.7% loss for the day. APC was recently trading as high as $80.67 on 3/2/11 prior to the recent downturn. It was trading for $71.30 a year ago, providing a gain of approximately 6.4% over the last year. APC seems positioned to take advantage of increasing energy needs.

Top Ten Adds / Buys


(APC) / (RIG) / (BLK) / (DLM) / (GENZ) / (MDT) / (WHR) / (KG) / (CTV) / (JPM-WS)

Top Ten Sells / Closeouts


(BSX) / (KGC) / (ARG) / (NOVL) / (MI) / (LNG) / (BYD) / (STWD) / (FDO) / (GGP)

I am reviewing what Paulson has sold and added for possible long and short trading opportunities.

Conclusion

Distilling Paulson's hedge fund to its primary elements leaves us with gold, financials, and energy. With the five stocks selected from these sectors by the hedge fund guru Paulson trading lower, an opportune occasion to acquire the equities has presented itself. At the very least, I am keeping the securities on my watch list, with a close eye on the news regarding recent global events.

I believe investors will realize things aren’t as bad as the excessively hyped 24/7 news coverage would have us believe and the downward trend will reverse. I have faith the Japanese people will thoroughly resolve the issues quickly. Remember, nothing lasts forever, It's always darkest before the dawn and fortune favors the bold.

Source: Are Hedge Fund Guru John Paulson's Top Holdings on Sale?

Additional disclosure: Detailed fund information was gathered from gurufocus.com. Please consult a financial advisor regarding suitability of any investment.