A colorful sunset playing out across a closely trimmed lawn creates an ideal setting for a clubby gathering of hedge-funders and socialites in Southampton on a recent Saturday. John Paulson is there with his wife, an attractive blonde wearing a scalloped black and white blouse, coordinating skirt and black patent-leather Dior handbag. Paulson wears the late afternoon's uniform for men: blue blazer, light-blue custom-cut shirt and light trousers. The pair make their way through the crowd, greeting nearly eveyone by name, though on this day they are not the hosts of the gathering. Among the people they visit with are celebrated hedge fund gurus Louis Bacon and George Soros, the latter of whom came in number-two to Paulson's historic payday of $3.7 billion last year; a figure, and ranking, codified by Alpha magazine in April with their annual list of top-paid hedge-fund managers.

Talking Head

John Paulson’s successful gamble in 2007 has made him the go-to guy for quotes about the markets.

I don't consider myself a bull or a bear. I'm a realist."

Zzzzzzzzzzz,' is the sound Paulson hears in his head when forced to listen to the people "telling us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond."

Speaking about his now famous gamble: "I've never been involved in a trade that has such unlimited upside with a very limited downside."

Soros isn't used to coming in second, nor is he used to having a lunch invitation rebuffed, which is, according to the Wall Street Journal, exactly what happened last year as the septagenarian's four decades of investment experience told him to seek out Paulson, the man who knew what was playing out in those early, chaotic months of 2007-before the term "subprime mortgage" was a household term. On this recent occasion, though, Paulson is much more convivial; this is a party after all. Polite banter offers veneer for the rabid networking that is actually unfolding amidst the passed shrimp and "southsides." These days, everyone wants to meet John Paulson. As chronicled by Vanity Fair this month, Paulson galvinized his winnings locally in Southampton by plunking down $41.3 million for "Old Trees," the lakefront, 13-bedroom, 20,000-square-foot, shingle-style mansion on First Neck Lane, an estate incorrectly speculated (widely) to have been bought by Tiger Woods earlier this year. In many camps-this sunset crowd included-Paulson is considered an even bigger celebrity than the unbeatable golfer. Casting a shadow this big, this fast would seem an unnerving experience, but by all signs, Paulson is having the time of his life.

Having founded his namesake fund, Paulson & Co., only 13 years earlier, Paulson didn't yet have Soros's long, impressive track record, though surely his stature is already imposing by any other standard. Soros and Paulson both bet heavily on the collapse of subprime mortgages and both reaped benefits in 2007 in excess of $3 billion. Paulson's payday, the highest in hedge-fund history, bested Soros by nearly $1 billion. (The combined list of 50 managers on Alpha's annual list brought in a total of $29 billion.) The magazine, a spinoff of Institutional Investor, has become something between a bible and a school yearbook for the hedge-fund community, and is even throwing their first "prom," of sorts, on September 24 at the St. Regis Hotel in New York. It is their first annual Hall of Fame Awards, and among the honorees are Julian Robertson, Louis Bacon, Paul Tudor Jones, Ken Griffin, Bruce Kovner, James Simons and George Soros. It is an illustrious list, but one devoid of the current prom king. Paulson has become very reticent to showboat as of late, perhaps in deference to the great disparity his financial boon creates in light of the rampant troubles being experienced by so many others. Whatever the reason, it is a far cry from the nightclub-hopping days he long enjoyed in the Hamptons when he was single and more apt to put a pretty lady under the magnifying glass than to allow his own personal life to be scrutized by one. He was a fixture at the trendy fundraisers in the community and ran with a fast fashion/finance crowd, many of whom have also gone on to serious financial careers (meaning you won't see them table-dancing any more, either). Now a married man and father, Paulson prefers to let another generation of young bucks fill his spot on the circuit. These past few years, work has been keeping him rather busy. Paulson catapulted to the top of the Alpha magazine list (and everyone else's list in the process) with a daring market position that was part research and part instinct. In addition to Paulson's own winnings, his overall funds were up $15 billion for the year.

Ironically, the 52-year-old Harvard MBA was formerly a managing director at Bear Stearns, the company devastated by the very market turn that so enriched Paulson. The maverick's win comes from betting against the tide, and Bear Stearns, possibly more than any other company, was the tide. That Paulson still had eyes and ears at the company seems within reason, and that he possibly helped fan their flames has also been speculated. But Bear Stearns insight wasn't the only personal connection Paulson had to this market phenomenon. Some 16 years ago, Paulson secured impressive homes in Manhattan and Southampton through foreclosure sales during the last housing debacle. Perhaps more than anything else, Paulson is a man who sees opportunity in chaos.

Having studied data that supported his growing instinct in 2006 that we were heading again toward a housing bubble, and that lending practices were increasingly fast and loose, Paulson established a fund specifically targeting the demise of risky loans with Paolo Pellegrini steering it. That the handsome Italian Harvard MBA had previously been married to real-estate heiress Beth Rudin DeWoody didn't hurt-his insight into that market was wider and more informed than most bankers. In the spring of 2006, $150 million was raised to support these instincts. By the end of that year, Paulson's gamble had paid off 20 percent, two months later he was up by 60 percent. By the end of the year, Paulson's earliest fund (by now he had more) was up 590 percent.

Approximately 10,000 hedge funds operate worldwide, and not all have had Paulson's glowing success. Their practices are all but opaque to government oversight, and the unsuccessful ones drag down unwitting investors in catastophic crash-and-burns, sometimes on the scale of Enron. In the spring of this year, Paulson's near namesake (Henry Paulson, Treasury Secretary-no relation) advised hedge-funders, such as that other Paulson, to adopt guidelines increasing disclosure and risk management. Perhaps the treasury secretary should take a page from Soros' book and ask Paulson to lunch.

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