(Bloomberg News) John Paulson, the billionaire hedge- fund manager coming off record losses in 2011, posted a 2 percent loss last month in his Advantage Plus Fund, according to a monthly update to investors obtained by Bloomberg News.

The fund, which seeks to profit from corporate events such as takeovers and bankruptcies and uses leverage to amplify returns, is down 18 percent this year with the July loss. Paulson's Gold Fund, which can buy derivatives and other gold- related investments, rose 0.2 percent in July and has declined 23 percent this year. Slumping gold-mining stocks have contributed to declines in the Advantage funds and Gold Fund this year.

The firm's merger arbitrage, credit and recovery funds, which comprise more than 60 percent of the firm's $21 billion in assets, rose this year on the firm's "long event positions," Paulson said today in the letter to clients. Event-driven managers bet on companies facing mergers, spinoffs and bankruptcies.

"While the Advantage and Gold Funds' performance is negative on a year-to-date basis, we believe substantial upside exists as our event catalysts unfold and the imbalance between record high earnings and low valuation corrects across the gold mining sector," Paulson wrote.

Armel Leslie, a spokesman for New York-based Paulson & Co., declined to comment on the returns.

Euro 'Instability'

Paulson, 56, who became a billionaire by betting against the U.S. subprime mortgage market, told investors last month he sees a 50 percent chance the euro will unravel, according to an investor who listened to the comments. An event causing a breakup may happen in three months to two years, Paulson said on a conference call reviewing second-quarter performance. In April, he said the firm was shorting European sovereign bonds and buying credit-default swaps on the region's debt, or protection against the chance of default.

"The instability in the euro region and risk and consequence of the euro unraveling are too severe for us to maintain significant market exposure," Paulson said in today's letter. "Our funds are well-positioned for either a major market dislocation or smaller market gyrations if the decline in Europe is less drastic."

Reduced Risk

Paulson told clients last month that his firm reduced risk in some of its funds. So-called net exposure in its Advantage funds is about 11 percent; at the Credit funds it's minus 9 percent; and at the Recovery funds, which bet on assets Paulson believes will benefit from a long-term economic advance, it's 31 percent, the investor said. Net exposure is calculated by subtracting the percentage of a hedge fund's short positions, or bets on falling securities, from its long holdings, or wagers on rising stocks and bonds.

Paulson relayed his concerns about the European debt crisis to investors this year after losing 51 percent in 2011 in his Advantage Plus fund, which was driven by an ill-timed bet on a U.S. economic recovery. Paulson's Advantage Fund, which employs a similar strategy to the Advantage Plus Fund, fell 1.6 percent in July and 13 percent this year.

Paulson's Recovery Fund, which invests in assets Paulson believes will benefit from a long-term economic rebound, such as financial services, insurance, hotels and real estate companies, fell 0.8 percent in July and gained 3.9 percent in the first seven months of 2012.

The Paulson Partners Enhanced fund, which invests in the shares of companies involved in mergers, rose 1.3 percent last month and 5.4 percent this year.

Paulson's Credit Opportunities Fund increased 0.9 in July and 3.8 percent this year. The fund jumped 590 percent in 2007, largely because of Paulson's bets against the U.S. subprime mortgage market.