Gold denominated share classes are worth their weight for Paulson clients

Gold-denominated investments in Paulson & Co, the $34bn hedge fund manager run by John Paulson, have more than doubled underlying returns in the group's funds for clients.

More than a third of Paulson's total assets under management, including all of Mr Paulson's personal investments, are now denominated in gold share classes, according to people familiar with the funds.

It is a sign of concern about inflation risks as a result of central banks' loose monetary policies.

The gold class of Mr Paulson's flagship Advantage fund, which manages about $7bn, is up about 6.7 per cent to date this year.

However, the regular dollar-denominated Advantage share class is down 1.3 per cent, having lost 4.8 per cent in May, which proved to be the most difficult month for hedge funds since the collapse of Lehman Brothers.

While dollar-denominated investments in Advantage returned 13.6 per cent in 2009, the gold share class returned 31.08 per cent, according to one investor.

The $7bn Paulson & Co Credit Opportunities fund, which famously returned 590 per cent in 2007 thanks to its short positions against the US subprime mortgage market, is up 5.3 per cent so far this year. Gold-denominated shares in the fund are up 13.5 per cent.

Paulson had no comment.

Hedge funds typically denominate their share classes in dollars, but concerns about inflation have made gold-linked share classes increasingly popular.

The Paulson gold share classes use futures and ETF investments to convert dollar exposure into physical gold.

The shares aim to "hedge out 100 per cent of dollar exposure" according to Paulson's marketing materials. In the same materials, the firm also highlights the correlation between the price of gold and monetary supply - an indication of concerns that central banks' efforts at quantitative easing will lead to inflation.

Paulson is the largest of several hedge funds that have begun to offer investors the opportunity to denominate their shares in gold.

The gold share class was launched in January 2009.

Greenlight Capital, the $2bn US fund run by David Einhorn, has a large gold share class.

The Advantage fund intends to have between 10 and 15 per cent of its investment portfolio exposed to gold-linked positions, such as mining stocks and investments in the Paulson stand-alone gold fund.

The Paulson gold fund is up by about 5 per cent in the year to date, having returned 0.5 per cent in May, a month in which the average hedge fund loss was 2.6 per cent.