(Bloomberg News) John Paulson, the billionaire hedge-fund manager seeking to reverse record losses in 2011, is digging himself into a deeper hole with a bet that Europe is facing a financial crisis.

The $22 billion firm had losses in all its funds last month as stock markets rose. The losses were led by a 7.9 percent drop in his Advantage Plus Fund, according to an update to investors obtained by Bloomberg News. That leaves the fund, which seeks to profit from corporate events such as takeovers and bankruptcies and uses leverage to amplify returns, down 16 percent this year.

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

Paulson, 56, who became a billionaire by betting against the U.S. subprime mortgage market, told investors in April that he was shorting European sovereign bonds and buying credit- default swaps on the region's debt, or protection against the chance of default. In February he said the euro is "structurally flawed," and will eventually fall apart.

"The risk of a European financial crisis is the largest risk in the market," Paulson told investors in a letter dated yesterday, in which he said hedges and short sales caused the losses. "Our funds are positioned to protect capital when market gyrations produce drawdowns."

Hedges are offsetting trades and shorts are bets that the prices of securities will fall.

The MSCI All-Country World Index jumped 5 percent last month, including dividends. The Standard & Poor's 500 Index capped the biggest June rally since 1999 as European leaders agreed to relax conditions on emergency loans for Spanish banks and possible help for Italy, measures that won't eradicate the region's sovereign-debt crisis, Paulson said.

'Temporary' Impact

"The plans announced at the end of June will prove insufficient in solving the structural problems of the euro zone," Paulson wrote in the letter. "Like the passage of the Greek bailout plan in March, the plans' impact on the markets will prove temporary and short-lived. These plans do not solve the productivity gap among euro-zone countries, current account deficits, government deficits, unemployment, and capital outflows."

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. The gold-share class of the fund declined 6.6 percent in June and 14 percent this year. Investors can choose between gold- and dollar-denominated versions of most of Paulson's funds. Paulson's Advantage Fund, which employs a similar strategy as the Advantage Plus Fund, fell 5.7 percent in June and 12 percent this year. Its gold shares slumped 3 percent in June and 8 percent in the first half of the year.

Gold Fund

Paulson's Gold Fund, which can buy derivatives and other gold-related investments, fell 0.7 percent last month and 23 percent this year. Losses in gold-mining stocks have contributed to declines in the Advantage funds and Gold Fund this year. The 59-member S&P/TSX Global Gold Index slumped 0.4 percent in June and 15 percent in the first half of 2012, including reinvested dividends. Bullion gained 2.6 percent last month after Europe's leaders took steps to resolve the debt crisis, boosting the outlook for global growth and commodities demand.

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 2.3 percent in June and gained 3.5 percent in the first half of 2012. The gold shares slumped 0.7 percent last month and advanced 3.6 percent this year.

Partners Enhanced

The Paulson Partners Enhanced fund, which invests in the shares of companies that are involved in mergers, declined 4.9 percent in June and climbed 4.1 percent this year. The gold share class fell 2.2 percent last month and gained 4.4 percent in 2012.

Paulson's Credit Opportunities Fund decreased 2.8 percent last month and advanced 2.2 percent in the first half of the year. Its gold shares fell 1.5 percent in June and climbed 2.2 percent in 2012. The fund jumped 590 percent in 2007, largely because of Paulson's bets against the U.S. subprime mortgage market.