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Paulson & Co. Shifts Bets to Corporate-Debt Losses

John Paulson, the manager whose credit hedge funds gained an average of 440 percent this year on bets against subprime mortgages, said corporate debt will be the next to fall as the U.S. economy heads toward recession. “House-price declines accelerate, consumer spending declines, credit costs continue to rise,” Paulson said in a slide presentation to about 500 people at Paulson & Co.’s annual meeting at the Metropolitan Club in Manhattan last night.Paulson has increased his holdings of derivatives that gain in value when the chances of corporate credit defaults rise. His funds will limit equity holdings in 2008, focusing on companies going through mergers and other corporate events, according to a copy of the investor presentation obtained by Bloomberg. Paulson will pursue market-neutral trades, which seek profits whether stock markets rise or fall.

Interest-rate cuts may fail to prevent a recession, which Paulson called likely, according to Paulson’s presentation. Federal Reserve policy makers lowered their benchmark rate by 0.75 percentage point at the past two meetings, and federal funds futures show traders see a 100 percent chance of a reduction next month.

At last night’s meeting, predictions of an economic malaise were followed by a cocktail reception and three-course dinner featuring boneless duck confit over celery root and black truffles, and roast rack of lamb, according to a menu. The cheese and dessert course included soft Gorgonzola, sorbets and berries.

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http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aQDYCIBvc96s