Hedge fund manager John Paulson performed well during the credit crisis, but of late, his hedge funds have been trounced. Last year his flagship fund, Paulson Advantage, lost 35%. Year-to-date the same fund is down about 13% and his Paulson Advantage plus, the leveraged version following the same strategy, is down 18%. Needless to say investors in these funds and others he manages with similarly poor performance are running for the exits. Trouble is that these are hedge funds, so that means there are only certain times during the year when they will let you out. Citigroup recently decided to pull almost $500 million from his funds, as have many other large, institutional investors. He once managed $38 billion, and is now down to about half that amount. One of the other challenges for hedge funds is the high water mark – this is the level above when the fund manager earns his fees. If, for example, in year 1 the investor’s portfolio value with the hedge fund manager rises to $1.5 million from $1 million, the fund manager would charge his fee on the increase of $500,000. From that point forward, the high water mark is $1.5 million, so until and unless the fund manager grows the portfolio above that level, he will not earn any more fees on that portfolio. This can be a good thing for the investor, but the risk is that the fund manager, who probably has multiple funds, may lose interest in actively managing that fund, since it may be unlikely, no matter how well he performs, that he will surpass that high water mark. In Paulson’s case, he is down so far it will take nothing short of a miracle for him to grow portfolios enough to once again earn fees. This doesn’t seem to be bothering him too much, since he is more concerned with his new home purchase – a $90 million Aspen ski palace formerly owned by a Saudi Prince. I guess he made enough from the funds he manages that he doesn’t really have to worry about too much anymore. Unfortunately that cannot be said or his investors that are suffering with heavy losses in a rising market.