[by Larry Goldfarb]

Just days to go before the 10/31 deadline for investors to request redemptions from the Paulson funds

A number of investors - large and small - who have remained invested over the years in a John Paulson-managed hedge fund are presently opting to either reduce their capital at risk or redeem their money in its entirety by year-end.  It's the latest blow to Mr. Paulson, who became famous by betting correctly on the collapse of housing prices in 2008. 

The 92nd Street Y in Manhattan is one of those investors.  It decided to end a particularly interesting arrangement with several of its board members who are some of the country’s most savvy investors and renowned hedge fund managers.  They include:

• John Paulson, the founder of Paulson & Co.
• Curtis Schenker, the founder of Scoggin Capital Management
• Marc Lasry, the founder of Avenue Capital Group,
• Ricky Sandler, the founder of Eminence Capital

The arrangement went something like this:  each fund manager would donate money to the YMHA, then manage those funds - free of any fees and free of any risk.  This meant that, if the funds were to drop in value, the manager would be obligated to make up the difference.  Initially, it was an offer the Y couldn't pass up.  But over time, while watching the Paulson funds steadily drop throughout the past 22 months, this not-for-profit organization felt that "enough was enough." 

Executives of the 92nd Street Y were eager to cash out and construct a more diversified portfolio elsewhere.  The most prominent of their concerns was the possibility of a catastrophe, which might render any of the money managers unable to repay the losses - that, in effect, would render the risk-free guarantee meaningless.  And so, the Y recently opted to redeem its hedge-fund investments, these people said, and rebuild its financial strategy from scratch.

Citigroup With Much More at Stake.   Citigroup Inc.’s private bank reportedly is pulling about $500 million from Paulson & Co., as billionaire John Paulson continues to try and reverse his record losses in 2011. Yet, through 9/30/12, Paulson dropped another 15% - and there's still 3 months to go in this, so far, losing year.  Citi revealed in August that it would "claw back its funds", beginning in 2013.

No word yet as to whether other significant players, including the brokerage arm of Morgan Stanley, are considering pulling any funds from Paulson.

More on the 92nd Street Y.   Located on Manhattan’s Upper East Side, the Y is a cultural mecca, featuring everything from breastfeeding classes for new moms to talks with the Nobel laureate Elie Wiesel. Its enormous board of directors includes the Seagram liquor heir Matthew Bronfman and the Loews family matriarch Joan Tisch, and its exclusive nursery school became infamous in the early 2000s after revelations that the telecom analyst Jack Grubman had manipulated his stock research as a favor to his boss, Citigroup chief Sanford Weill. who  helped Grubman’s twins gain admission to the Y.

The Y’s investment kitty, a roughly $40 million endowment, according to financial statements reflecting the fiscal year ended June 2011 (the most recent report available), is relatively small. But because of its highflying directors, many of whom have sent children or grandchildren through its nursery school, the Y nonetheless had access to top-shelf hedge funds.

In recent months, the Y has turned its investments over to a new board member and hired an outside advisor to recommend a new strategy for its portfolio, said the people familiar with the matter. The advisor has suggested a more traditional approach to investing, according to these people, including the possibility of individual stocks and bonds, but not excluding the possibility of hedge funds.

For more information, please read [CNBC - Article #1, 10/26/2012]   and    [CNBC - Article #2, 10/26/12].