According to a mid-year presentation from Paulson & Co, John Paulson’s funds are still making money from defaulted securitiespurchased years ago. Paulson Credit Opportunities Fund is up 6.6% through May and is one of the firm’s best performing hedge funds this the year. The credit fund returned 23% in 2013. Strategy-wise credit makes up for Paulson & Co.’s second largest allocation. With $6 billion in the credit strategy, the Credit Opportunities Fund is fully invested, according to a letter to investors obtained by ValueWalk.

Paulson credit fund return

Along with Paul Singer and Seth Klarman, John Paulson has steadily profited from liquidations of Lehman Brothers’ debt. Paulson bought Lehman bonds in late 2008, and the investment has brought his funds a gain of 16% YTD.

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Paulson returns from Lehman Brothers

Paulson makes a killing in defaulted securities

Defaulted securities make up for 27% of the credit fund’s assets, the fund’s largest allocation followed by convertible bonds that make up 23% of the portfolio. Another bankrupt company that is making Paulson richer is GMAC Rescap. Paulson & Co. had positions in Rescap’s junior secured and unsecured bonds before bankruptcy that led to a $600 million profit for the hedge fund. Paulson later bought more unsecured bonds of Rescap after the company defaulted in 2012. The hedge fund is one of the largest holders of Rescap debt and has led restructuring efforts at the company. Rescap liquidating trust has provided an impressive return of +140% YTD.

Rescap liquidating trust

Energy Future Holdings (TXU) filed for Chapter 11 protection in April this year. The defaulted company is looking to shed $40 billion in debt and here again Paulson has built up a position in TXU loans. The fund’s holdings have traded up after the bankruptcy filing and have returned 15% YTD.

Take a look at Paulson’s returns from Merger funds.

Gains from landmark restructuring at Solocal

Solocal Group is a French company that makes online and printed directories formerly known as PagesJaunes Groupe. Paulson has been doing his magic here as well, through the hedge fund’s significant position in the company’s debt. Solocal implemented an equity offering in May to which two-third of its lenders had agreed. Solocal’s loan is up 26% whereas equity has traded up nearly 57% YTD.

Paulson gains in Dex Media, mortgage insurers

The credit fund also has a position in Dex Media Inc (NASDAQ:DXM)’s equity and high-yield debt. The fund has benefited from the merger activity at the company as digital growth in the sector has driven up the return on debt. Dex Media is also a position of Kyle Bass.

Last year, Paulson’s investments in mortgage insurers were in the news as their equities gained manifold. The credit fund has positions in the Radian Group Inc (NYSE:RDN) and MGIC Investment Corp. (NYSE:MTG), the convertible bonds have traded up 50% and 42% respectively in this year so far.

Stay tuned for more on Paulson’s hedge funds, as the firm celebrates its 20-year anniversary.