Billionaire Hedge Fund Manager John Paulson's Inversion Bet Falls Sharply

Billionaire John Paulson, who initially made his fortune betting against subprime mortgage bonds, has been one of the most aggressive hedge fund managers to bet on stocks that would benefit from the tax-driven inversion deal wave that has swept corporate America this year. Now, one of Paulson’s big inversion bets appears to be in trouble as the U.S. government moves to discourage such tax inversion deals in which U.S. companies attempt to lower their tax rates by redomiciling offshore.

Paulson’s hedge funds are the second-biggest shareholders of Irish drugmaker Shire , which has a $51 billion deal to be purchased by AbbVie , an Illinois-based company. If completed, AbbVie would redomicile in the U.K. in what would be the biggest inversion deal ever done. But AbbVie is now saying it is rethinking doing this deal after the U.S. Treasury Department adopted new tax regulations that make inversions less attractive to U.S. companies. AbbVie’s board of directors could decide to recommend shareholders scrap the deal when it meets next week.

Shares of Shire tanked on Wednesday, falling 30%. Paulson is not the only prominent hedge fund manager who has been betting on Shire—Magnetar Capital and billionaire Paul Singer’s Elliott Management have also reported stakes in Shire.

The sharp drop in Shire’s shares comes at a particularly bad time for Paulson. His main hedge funds performed poorly in September and are down for the year. For example, Paulson’s Advantage Plus Fund fell by about 11% in September and is now down 14% this year. His Advantage Fund was down 13% in the first nine months of the year and his Recovery Fund had lost 6% for the year.

Some of Paulson’s other big inversion bets have sold-off amid the recent market turmoil. Allergan, the Botox-maker that is trying to fight off an attempted inversion deal by Canada-based Valeant Pharmaceuticals, has seen its stock drop this week, falling 6% on Wednesday. The stock is most often associated with another hedge fund billionaire, William Ackman, whose Pershing Square hedge fund is Allergan’s biggest shareholder and working with Valeant to get the deal done. But Paulson, who supports the deal, built a $1 billion stake in Allergan through his hedge funds this summer. Paulson's hedge funds have in recent weeks also disclosed a stake in Covidien, the Irish medical device maker that has accepted a $43 billion inversion deal from Medtronic. Shares of Covidien fell by more than 10% on Wednesday.

Another inversion vehicle in which Paulson's hedge funds have a stake, Mallinckrodt, has seen its stock drop by nearly 8% in the last week.