Morgan Stanley Wealth Management has told its financial advisers to encourage clients to redeem holdings from the two umbrella funds managed by billionaire hedge fund manager, John Paulson, according to a report from CNBC.

Morgan stanley

According to the report, Morgan Stanley (NYSE:MS) put the Paulson Advantage and Advantage Plus funds on “watch” due to poor performance. Last year, Paulson Advantage lost 36 percent, while Advantage Plus fund lost 51 percent. On Tuesday, the brokerage firm sent a letter to its financial advisers that the status of the funds was changed to “redeem.”

Morgan Stanley (NYSE:MS) has approximately $100 million of its clients’ money invested in the two funds, according to a person familiar with the issue. The Paulson Advantage and Advantage Plus funds have $5.7 billion assets under management as of November 1, 2012.

According to CNBC, the Paulson & Co did not expect Morgan Stanley’s action despite the fact that the funds were being monitored, and its performances remained weak. The report cited that Paulson Advantage declined by 17 percent, and the Advantage Plus dropped by more than 20 percent this year.

Recently, a large firm with over $100 billion has pulled some money from Paulson & Co  according to our sources at the firm. They asked not to be named as they were not authorized to speak.

A related report from Reuters noted that some of Morgan Stanley’s clients already decided to redeem their holding from the two funds. The amount of the investments is around $36 million out of the $100 million expected to be pulled out from the funds.

Last August, Citigroup Inc. (NYSE:C) pulled out around $410 million investor money from Paulson’s umbrella funds due to poor performance. The bank also redeemed its investments from Paulson Recovery and Paulson Partners funds, which are focused on investing in financial stocks and merger arbitrage, respectively.

On the other hand, Bank of America Corp (NYSE:BAC) Merrill Lynch said in August that it has no plans to pull out investors’ money from Paulson’s funds.

Morgan Stanley’s investments in other funds managed by Paulson were not affected by the redemption. As of November this year, the Paulson Partners fund and the Credit Opportunities fund were up by 7 percent and 6 percent respectively.

Paulson’s funds currently have $19.5 billion total assets under management. In 2010, the hedge fund managed $36 billion assets.

Paulson made billions of dollars on his bet against the housing market in 2007. However, his Advantage funds were negatively affected by the declining price of gold.