A Forbes article argues that billionaire John Paulson’s hedge funds have become too big to manage. John Paulson made fortunes in 2007 by betting against subprime mortgages, which has been described as the greatest trade ever (and the name of a book by Gregory Zuckerman). Soon, investors started pouring money in his funds and Paulson funds topped $38 billion in 2011.

John Paulson

However, his funds have performed poorly in the last two years. His Advantage Plus Fund plunged 52 percent, and his Advantage Fund was down 35 percent in 2011. Paulson’s Credit Opportunities Fund also declined 18 percent in 2011. His biggest mistake it seems, was to go along with the big bank stocks like Bank of America, where he lost tons of money. Another mistake, he sold all these big positions right before those stocks began to rise dramatically in 2012. He also lost money by betting on gold miners and a Chinese tree company.

Wealth managers, including Morgan Stanley (NYSE:MS) and Citigroup Inc. (NYSE:C), have asked their clients to redeem their cash from many of Paulson’s funds. As a result, John Paulson is managing a little over $19 billion, almost half of what he managed in 2009.

To support how his point of size affects a hedge fund’s performance, the Forbes author argues that some of the enigmatic hedge fund stars have resisted getting bigger. For example, David Tepper of Appaloosa Management manages $16 billion and is up 25% for 2012. Tiger Global, which is managed by Charles Coleman and Feroz Dewan, manages about $8 billion. Both the funds could manage a lot more money, but they have stayed small by choice.

If size is the most important factor behind a hedge fund’s performance, how did Bridgewater Associates manage to return 23 percent in 2011, the same year when hedge funds lost 5 percent on an average? Bridgewater is the world’s largest hedge fund with more than $120 billion of assets under management. Ray Dalio did it by betting against U.S. Treasuries, Japanese Yen and German bonds. Over the past 20 years, Bridgewater has yielded 14.7 percent of average annual return.

Another big hedge fund, Brevan Howard Master Fund returned 12.12 percent in 2011. Brevan Howard manages $34 billion of assets. Why didn’t the size of these two funds pull them into heavy losses? Because they adapted much better strategies. For example, Ray Dalio gave exceptional returns to investors by following a go-anywhere strategy. He is a real macro investor betting in very liquid markets.

Strategies matter, NOT size. Paulson funds can also yield good returns if they go after right things. What do you think?