John Paulson, one of the world's most closely watched hedge fund managers, told clients on Monday that he sees a 50 percent chance the euro zone will break up, according to an investor.

Paulson underscored his negative sentiment on Europe in a regularly scheduled call with investors.

The investor asked not to be named since Paulson & Co's funds are private.

A Paulson spokesman declined to comment.

Paulson earned billions of dollars betting against the overheated housing market in 2007, but he ranks as one of the year's worst performing hedge fund managers this year.

So far in 2012, his bets against Europe have hurt some of his portfolios. His Advantage Plus fund lost 18 percent during the first six months of the year after losing more than 50 percent last year, investors said.

Paulson is known for making big bets and sticking with them, and he has long suggested that European policymakers' efforts to solve the region's debt crisis will fall short.

 Paulson and Co Inc. is on track to survive a reversal of fortune that sources say very few other hedge fund managers could withstand.

Assets declined $17 billion " 44.9%" to $21 billion as of June 30, down from a peak of $38.1 billion in February 2011. Much of the loss is the result of poor performance over the past year of the New York-based company's flagship Advantage event-driven arbitrage strategy, although there have been modest investor redemptions, sources said.

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Daniel Shak, 53, filed a lawsuit against his former wife Beth Shak last month, demanding 35 per cent of her shoe collection. He claimed she had kept the shoes hidden in a secret room in their Fifth Avenue apartment, meaning he was unaware of their value when he agreed to a $3.25 million divorce settlement.

This week the case came to court, but after a morning of testimony, during which Mrs Shak, 51, described her vast shoe collection as "a sickness", Mr Shak told his lawyer to withdraw the case. The judge agreed, telling Mr Shak: "Well, thanks very much for wasting everybody's time."

According to FT.com, State Street said it will buy the hedge fund administration arm of  Goldman Sach's, as the Boston-based custody bank announced a drop in revenues in the second quarter.

The $550m cash purchase will make State Street the world's largest provider of services to alternative asset managers such as hedge funds, the bank said, as a 1.9% drop in revenues on the year before to $2.43bn illustrated the challenge it faces to grow in volatile markets with interest rates near zero.

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The end of June saw equity markets briefly rally, which gave some hope to the remaining optimists. However standing back and taking a longer term view puts things into perspective. 

Australia's equity market is well and truly stuck between a rock and a hard place, remaining almost 40% below the peak reached in November 2007 in spite of the Treasurer advising all who might listen that the local economy is the envy of the world.

That tells us two things - firstly, he might be talking his own book, and secondly that the rest of the world is in a mess. And of course Australia's economy remains firmly in the grip of those of the US, Europe and particularly China.

Absolute Return and hedge funds have certainly outperformed over the short, medium and long term - and particularly so over the past five years. Meanwhile over the past 12 months any gains have been particularly hard won.

* Based on 31% reported June results.

The above table shows that on a relative basis hedge funds have done well, with 80% outperforming the ASX200 over the past year. However their aim, and in most cases their claim, is to provide investors with an absolute return. On this basis, only 43% succeeded.

No doubt the critics will jump on this fact to claim that hedge funds have failed to deliver, and some have. But the real message is that there are enough funds that do succeed in providing attractive risk adjusted returns to make the reward for finding the exceptional ones well worth the effort.

Regards,
Chris Gosselin

Tomorrow, June 30th sees the end of the financial year in Australia, and while that has little impact on many of our overseas subscribers, for Australian investors in managed funds it marks a yardstick as profits from the last 12 months have to be distributed (even if re-invested) and then accounted for in their personal 2012 tax returns.