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We have recently obtained a 44 page letter from John Paulson’s hedge fund Paulson & Co.,  which provides a highlight of the quarter and gave an overview for the upcoming quarter.

Overall, the firm’s funds performed well in quarter but concerns linger over Europe.

Here’s a few highlights from the report.

First Quarter Performance

For the quarter, Paulson Funds appreciated on average 4.6 percent with a high of 13.3 percent for Paulson Enhanced Ltd. with a -6.5 percent low for its Gold Funds. This can be broken down as the Paulson Merger appreciating by more than 6.3 percent while its double-weighted added from 11.6 percent to 13.3 percent.

The quarter saw less deal volume as compared to the previous year’s numbers but gains came from bankruptcy exchange offers, possible takeover targets, spread deals and other merger event positions.

For the Paulson Credit Funds, it appreciated by more than than 5 percent, benefiting from increases in corporate bonds, bank debt, mortgage-backed-securities, convertible bonds and post-reorganization equities.

The Paulson Recovery Funds increased approximately 9.5 percent in the first quarter from gains in financials, insurance companies, restructurings and real estate services companies.

Looking at the quarter’s declines, the Advantage Funds dropped -1.1 percent while the Advantage Plus funds fell -2.9 percent. Contributing to the declines were negative performance from the gold event sector and hedges.

The Gold Funds ended the quarter off -6.5 percent. While the year got off to a good start with a rise of 13 percent in January, volatility in February and March contributed to a negative performance for the quarter. Adding to declines in gold equity positions was political turmoil in Mali.

But with gold prices having in a net increase in the first quarter, Paulson’s gold share classes in all the Funds outperformed their respective dollar share classes.

Macro Overview

The U.S. economy is doing better than expected and equity markets are moderately priced; risks still exist. At the global level, the Euro crisis is still the greatest risk to global activity and global markets.

In the short-term the ECB has stabilized European credit markets through liquidity injections but its actions do not address the Eurozone’s major flaw: a monetary union that doesn’t have a fiscal and political union. Should the Euro come undone, it would affect all markets that the firm operates in.

Paulson is monitoring additions risks including increasing Middle East tensions, rising oil prices, and a possible China slowdown.

Additional short-term risks include Greece, Portugal, France and Spain. Greek elections are a concern with a move toward an austerity opposition along with the country’s exit from the Eurozone.

As for Portugal, it’s an unresolved issue and a second bailout will probably be needed.

French presidential elections in May will pose challenges to the Franco-German alliance. There’s also new risks with a new French government that could differ from the current European policy.

The LTRO benefits are starting to going away with Spanish CDS spreads reaching all-time highs. Spanish banking stocks are also declining from worries on Spanish sovereign and private sector credit risk.

Looking at the intermediate term, Spain will probably need a bailout assistance with its high deficit, its shrinking economy, rising unemployment and climbing debt to GDP.

We will be providing further coverage on the letter in the coming days.