Paulson Credit Opportunities

Investor Relations
Phone: (212) 956-2221
Fax: (212) 977-9505
www.paulsonco.com

590 Madison Avenue

New York, New York 10022

2007 Year End Report

The Paulson Credit Opportunities (PCO) funds had an extraordinary year. We thank all our
investors for participating with us and sharing in these phenomenal results. The table below
summarizes our net returns for the year.

Paulson Credit
Opportunities LP

Paulson Credit
Opportunities Ltd

Paulson Credit
Opportunities II LP

January
February
March
April
May
June
July
August
September
October
November
December

9.6%
66.9%
-6.3%
-3.6%
-0.8%
40.0%
75.7%
26.5%
4.9%
21.6%
5.7%
0.4%

9.6%
66.9%
-6.3%
-3.6%
-0.8%
39.9%
75.7%
26.5%
4.9%
21.6%
5.7%
0.4%

7.3%
35.3%
-2.7%
-3.8%
-3.9%
23.1%
55.8%
32.1%
3.7%
25.5%
4.6%
0.7%

7.2%
35.1%
-2.7%
-3.8%
-3.9%
23.0%
55.8%
32.1%
3.7%
25.4%
4.6%
0.7%

2007

591.3%

589.7%

352.9%

351.7%

Paulson Credit
Opportunities II Ltd

2007 Overview
The principal focus of our funds was to capture the gross mispricing of risk in the credit markets
by shorting the lower tranches of subprime securities. While spreads at the end of 2006 for 2006
vintage BBB subprime securities were in the 100 bps range, by the end of 2007 the securities
had fallen from par to 20 and spreads had widened to over 3000 bps.
The impetus for our trade began in 2005 from what we believed was an overvalued housing
market due to low U.S. interest rates and high levels of global liquidity. House prices rose
between 2000 and 2005 at five times the rate of the previous 25 years leading to what we
believed was a housing bubble. We also believed that the subsequent tightening of the Fed
Funds Rate from 1% to 5.25%, with a lag effect, would cause house prices to fall.

The above represents a partial list of deals and is presented for illustrative purposes only. There is no guarantee that in the future
these securities will be held in the Paulson funds. Performance results described herein are net of fees and expenses and
assume reinvestment of dividends and capital gains for the periods indicated. Past performance is not necessarily indicative of
future performance. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed.

-2Estimation of Housing Bubble: Comparison of Recent Appreciation vs. Historical Trends

Real
HomePrice
PriceIndex
Index (1975
(1975=100)
Real
Home
= 100)

200

180
Housing Bubble
160

140
Trend line 1975-2000

120

100
1975

1980

1985

1990

1995

2005 2Q
2007

2000

1.4%

7.6%

CAGR

Source: OFHEO, Bureau of Economic Analysis

The rapid rise in house prices led to a decrease in mortgage credit losses leading to an
explosion in subprime mortgage issuance. By 2006, subprime mortgage securitization reached
$500 billion, bringing the total amount outstanding to $1.3 trillion, equal to approximately 14% of
the total mortgage market, compared to less than 1% in 1994.
Subprime Mortgage Origination

Subprime Mortgage Origination

$bn
700

13.6%
SOM
600

500

400

300

200

100

0.9%
SOM

0
'94

'95

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

06

This material may not be distributed to other than the intended recipients. Unauthorized reproduction or distribution of all or any of this
material is strictly prohibited.

-3Concurrent with the explosion in volume was a substantial deterioration in credit quality, as the
percentage of loans with 100% financing, no income verification, or both, increased
dramatically.

Combined Loan
Loan to
Combined
to Value
Value

100% Financing
Piggyback
%
89.1

90

30%

87.4

88

33%

35%

24%

25%
86

85.0
20%

84

15%

82.3
82

16%

8%

10%

80.5
79.8

80

5%

3%

3%

2001

2002

0%

78
2001

2002

2003

2004

2005

2006

2004

2005

2006

Piggyback
& Limited
DocDoc
% %
100% Financing
& Limited

Limited
Documentation
%
Limited
Documentation
44%

45%

2003

16%

15%

41%
12%

38%

40%

12%

35%
35%
31%
30%

7%

8%

27%

3%

4%

25%

1%

1%

2001

2002

0%

20%
2001

2002

2003

2004

2005

2006

2003

2004

2005

2006

Source: Loan Performance

The growth in subprime originations was also fueled by the growth in the mortgage backed
securities market. Mortgages originated by third parties (New Century, Ameriquest, Accredited,
Saxon, etc.) were then sold to investment banks who repackaged these mortgages into
Residential Mortgage Backed Securities (RMBS) and sold them to investors around the world.
Each RMBS structure is sliced into various tranches (18 on average) with each higher rated
tranche being structurally senior to the junior tranches in the event of loss. Demand for these
securities was so high, and perception of risk so low, that the BBB tranche in the example

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material is strictly prohibited.

-4below, which had only 5.6% subordination and was only 1.4% thick, yielded only slightly more
than 1% above LIBOR. In other words, for an extra 1% yield, the investor risked losing all of his
capital if the cumulative loss exceeded 7%.

Subprime Residential Mortgage-Backed Securitization Example

ACE Securities Corp - ACE 2006-HE1

Class

Ratings

A1A
Aaa (AAA)
A1B1
Aaa (AAA)
A1B2
Aaa (AAA)
A2A
Aaa (AAA)
A2B
Aaa (AAA)
A2C
Aaa (AAA)
A2D
Aaa (AAA)
M1
Aa1 (AA+)
M2
Aa2 (AA)
M3
Aa3 (AA-)
M4
A1 (A+)
M5
A2 (A)
M6
A3 (A-)
M7
Baa1 (BBB+)
M8
Baa2 (BBB)
M9
Baa3 (BBB-)
M10
Ba1 (BB+)
Over Collateralization

Class Amount
Outstanding
$ 757,819,000
417,082,000
104,270,000
356,980,000
127,685,000
88,606,000
78,490,000
101,428,000
92,553,000
57,053,000
48,178,000
45,643,000
41,839,000
40,571,000
36,768,000
26,625,000
31,696,000
82,415,903
$ 2,535,701,903

Subordination

Spread to
One- Month
LIBOR

23.9%
19.9%
16.2%
14.0%
12.1%
10.3%
8.6%
7.0%
5.6%
4.5%
3.3%

0.14
0.15
0.15
0.04
0.09
0.15
0.25
0.27
0.29
0.30
0.45
0.48
0.58
0.95
1.35
2.45
5.50

Through extensive internal research efforts we determined that the cumulative losses in
subprime mortgage pools were highly correlated with home price appreciation (HPA). In
periods of very rapid HPA, losses were de minimis, but as HPA slowed, losses rose. Our
analysis of historical data, in concert with research work from several investment banks,
estimated that at 0% HPA cumulative losses would be in the 7% range and at a negative 5%
HPA losses would rise to the high teens.

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of this material is strictly prohibited.

-5Cumulative
Loss for Various HPA Scenarios
Cumulative Loss for Various HPA Scenarios
Loss

Loss
30.0%

25.0%

20.0%
17.5%
15.0%

10.0%
7.1%
5.0%

June '06: 83 bps

0.0%
20.0%

15.0%

10.0%

5.0%

0.0%

-5.0%

-10.0%

Home Price Appreciation ("HPA")

By June 2006, when we started PCO, HPA had already slowed to a 1% rate having declined
rapidly from over 15% only one year earlier. Given the degree to which we estimated housing
was overvalued, we forecast the rapid deceleration in home prices would likely continue and
that 0% to negative 5% HPA was highly probable. In such a scenario, the losses in 2006 RMBS
securitizations would likely exceed 7% and wipe out the BBB tranches. Yet the demand for
BBB remained strong, securitization volume continued to grow and spreads continued to
tighten.
Existing Home Sales Median Price
Existing
Home Sales Median Price
House Prices $K
Seasonally Adjusted
Last Points: Jul 2006
18%

240

16%
220
14%
$222
12%

200

10%
180
8%

6%

160

4%
140
2%
1%
0%

120
01/01

07/01

01/02

Level (thous., left scale)

07/02

01/03

07/03

01/04

year/year % change (right scale)

07/04

01/05

07/05

01/06

07/06

Source: National Association of Realtors &

A. Gary Shilling and Company

Source: Merrill Lynch, Paulson estimates

The above represents a partial list of deals and is presented for illustrative purposes only. There is no guarantee that in the future
these securities will be held in the Paulson funds. This material may not be distributed to other than the intended recipients.
Unauthorized reproduction or distribution of all or any of this material is strictly prohibited.

-6-

We were astounded at the mispricing of these securities and after reaching our target short
positions in the Merger and Event Funds we set up Paulson Credit Opportunities (PCO) to
take a more concentrated short position in these securities. The PCO funds targeted a 12:1
notional short position to equity. Although the notional short position was large, PCO would only
have a negative carry of 7% net per year (12% gross at 100 bps spread less 5% earned on
cash balances). Below is the table estimating returns as part of our investor presentation in
June 2006.

Notional Short
Position Multiple
to Equity

Annual
Cost
(bps)

Advantage Fund

2.3X

Merger Fund

1.7X

Potential Gross Return

Assuming Loss of:
30%

50%

80%

216

62%

104%

166%

150

38%

64%

102%

341%

568%

909%

(a)

Credit Fund

12.0X

709

(a) Net. After 500bps earned on cash collateral.

As 2006 progressed, the underlying performance of subprime loans continued to deteriorate.

Remarkably, the demand for the BBB securities remained strong and spreads remained tight.
We viewed this as a window of opportunity to continue to raise money to short the securities for
PCO and, starting January 1, 2007, for PCO II. While we shorted the ABX Index, the bulk of our
short position was concentrated in individual RMBS securities that we believed were of inferior
quality to the Index and which traded at tighter spreads.
The subprime securities charade finally came to an end in 2007 as home prices continued to
decline, delinquencies continued to rise, and the prices of the BBB tranches plummeted.

The above represents a partial list of deals and is presented for illustrative purposes only. There is no guarantee that in the future
these securities will be held in the Paulson funds. This material may not be distributed to other than the intended recipients.
Unauthorized reproduction or distribution of all or any of this material is strictly prohibited.

-7Existing
Home
SalesMedian
Median Price
Existing
Home
Sales
Price
House Prices $K
Seasonally Adjusted
Last Points: Oct 2007
240

18%
16%

220

14%
12%

200

10%
$210
8%

180

6%
4%

160

2%
0%

140

-2%
-4%
-5.1 %

120

-6%

01/01

07/01

01/02

07/02

01/03

Level (thous., left scale)

07/03

01/04

07/04

01/05

year/year % change (right scale)

07/05

01/06

07/06

01/07

07/07

Source: National Association of Realtors &

A. Gary Shilling and Company

60 Day+ Delinquency and Foreclosure

January
February
March
April
May
June
July
August
September
October
November

2006
5.6%
5.8%
5.8%
5.6%
5.9%
5.8%
6.0%
6.5%
6.8%
7.4%
8.0%

2007
9.4%
9.9%
10.4%
10.7%
11.3%
12.2%
13.4%
14.8%
16.3%
18.1%
19.9%

% Change YoY
68.6%
71.9%
79.0%
91.3%
92.0%
109.7%
121.7%
127.4%
139.3%
145.3%
150.5%

December

8.6%

22.0%

155.2%

Source: Loan Performance

The above represents a partial list of deals and is presented for illustrative purposes only. There is no guarantee that in the future
these securities will be held in the Paulson funds. This material may not be distributed to other than the intended recipients.
Unauthorized reproduction or distribution of all or any of this material is strictly prohibited.

-8BBB Prices

ABX HE BBB 06-2

ABX HE BBB 07-1

Source: Markit

CDOs
An important related market to the subprime securities market was the market for Collaterized
Debt Obligations (CDO). CDOs used as collateral various synthetic tranches of subprime
securities, which were then repackaged into securities and sold to investors. An estimated $320
billion of CDOs backed by subprime securities were issued in 2006 and 2007 as follows.

2006/2007
Volume
($ in billions)
Mezzanine
High Grade
CDO Squared

$129
167
24

Total

$320

Collateral
BBB Securities
AA/A Subprime RMBS and Mezzanine CDOs
AA/A Mezzanine CDOs

Source: Merrill Lynch

The hypocrisy of the CDOs was that Mezzanine CDOs, consisting exclusively of BBB
collateral, somehow had 70% of their capital structure rated AAA. It is the AAA CDO securities
that are causing so much turmoil in the markets as their holders (Merrill Lynch, Morgan Stanley,
Citibank, UBS, Wachovia) or their guarantors (Ambac, MBIA, ACA) are forced to write them
down.
The above represents a partial list of deals and is presented for illustrative purposes only. There is no guarantee that in the future
these securities will be held in the Paulson funds. This material may not be distributed to other than the intended recipients.
Unauthorized reproduction or distribution of all or any of this material is strictly prohibited.

-9Mortgage Collateral

RMBS Securitization

RMBS Collateral

AAA rated
tranches
(80% of
capital
structure)

Portfolio of
2006 Sub-Prime
Residential
Mortgages

CDO Securitization

AAA rated
tranches
(75% of
capital
structure)

Portfolio of
BBB and BBBtranches
of RMBS
securitizations

AA tranche (12%)

AA tranches (9%)
A tranches (3%)

A tranche (4%)

BBB+/BBB/BBB- (4%)

BBB tranche (4%)

BB tranches (2%)
Residual (2%)

Equity (5%)

The value of the CDO securities is simply nothing more than the value of the underlying
collateral. If the BBB collateral is worthless then the CDO is worthless. This obvious truth is
becoming painfully apparent as CDO securities are being downgraded and liquidated.

CDO Pricing
Implied Pricing Based on Value of Underlying Collateral(a)
Value of

Super

"BBB"

Senior

Junior

Collateral

AAA

AAA

AA

BBB

Equity

100
90
80
70
60
50
40
30
20
10
0

100
100
100
100
100
90
72
54
36
18
0

100
100
100
95
30
0
0
0
0
0
0

100
100
81
0
0
0
0
0
0
0
0

100
100
0
0
0
0
0
0
0
0
0

100
28
0
0
0
0
0
0
0
0
0

100
0
0
0
0
0
0
0
0
0
0

This material may not be distributed to other than the intended recipients. Unauthorized reproduction or distribution of all or any
of this material is strictly prohibited.

- 10 2008 Outlook
In general, we expect the U.S. credit correction to continue to worsen in 2008. We believe the
decline in nationwide home prices will accelerate in 2008 ultimately falling 15% to 25% from the
peak compared to a decline of only 5% as of November 2007.
Real Home Price Index (1975=100)

Real Home Price Index (1975=100)

200

180
Housing Bubble
160

140
Trend line 1975-2000

120

100
1975

1980

1985

1990

1995

2000

2005

3Q
2007

1.4%

7.6%

CAGR

Source: OFHEO, Paulson estimates

Recent trends in the housing market support this outlook as existing sales continue to fall at a
dramatic rate, inventories of unsold homes continue to skyrocket and the availability of
mortgage finance continues to contract.
Existing
HomeSales
Sales
Existing
Home
(SAAR,
millions)
(SAAR,
millions)
7.5

7.0

6.5

6.0

5.5

5.0

4.5
01/99

01/00

01/01

01/02

01/03

01/04

01/05

01/06

01/07

Source: National Association of Realtors

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of this material is strictly prohibited.

- 11 Existing Homes Inventory

Existing
HomesSupply)
Inventory
(Months
(Months Supply)

11

10

3
01/99

01/00

01/01

01/02

01/03

01/04

01/05

01/06

01/07

Source: National Association of Realtors

Mortgage Securitization Volume

December 07 vs. December 06

60

Subprime

Alt-A

Jumbo

$ 5 5 .7 bn

50

40

$ 3 7 .6 bn

30

1 0 0 % decline

20

9 8 % decline

$ 1 6 .5 bn
7 7 % decline

10
$ 3 .8 bn
$ 0 .9 bn

$ 0 bn

0
D e c ' 06

D e c ' 07

D e c ' 06

D e c ' 07

D e c ' 06

D e c ' 07

This material may not be distributed to other than the intended recipients. Unauthorized reproduction or distribution of all or any
of this material is strictly prohibited.

- 12 -

The decline in home prices will lead to a substantial reduction in U.S. Household wealth, which
together with reduced credit availability, will lead to a decline in consumer spending and to a
likely recession. Credit problems will expand beyond subprime mortgages to include: Alt-A,
jumbo, and prime mortgages; consumer credit, such as home equity loans, auto loans, student
loans and credit card loans; commercial mortgages; bank loans; and also extend to the
corporate bond market. We believe the increase in credit costs will continue to stress financial
institutions causing spreads to widen and causing certain institutions to fail.

Banks & Brokerages: Stressed Balance Sheets

25.9x

30.0x

20.2x

31.4x

42.5x

38.5x

3.3

2.3

2.1

0.9

2.2

0.9

Level 2 Assets / TCE

10.7x

12.2x

13.1x

14.9x

10.9x

19.4x

Level 3 Assets / TCE

0.5

1.7

0.8

1.6

2.3

2.9

11.2x

13.9x

13.9x

16.5x

13.2x

22.3x

Subprime CDO Exposure, Net

20.8%

55.8%

0.0%

N.A.

N.A.

N.A.

Subprime Loans on Balance Sheet

4.8%

58.4%

16.9%

N.A.

N.A.

N.A.

Home Equity Lines of Credit

191.2% 46.7% 131.6%

N.A.

N.A.

N.A.

Leveraged Loans

48.4%

57.4%

N.A.

N.A.

N.A.

Maximum Exposure to Loss from Unconsolidated VIEs

122.2% 182.9% 136.0%

N.A.

N.A.

N.A.

Credit Card Lines

1536% 1337%

991%

N.A.

N.A.

N.A.

110.0x

N.A.

N.A.

N.A.

Tangible Assets / Tangible Equity

Price / Tangible BVPS

Combined Level 2 and Level 3

Asset Quality as % of TCE

Credit Derivatives Notional (Gross) / TCE

51.0x

74.0%

45.9x

CDS Notional Exposure

Beginning six months ago, to benefit from the anticipated credit contraction, we purchased
protection on a select group of financial institutions. We have long felt that the excesses in the
credit markets were not confined to subprime mortgage securities and that other parts of the
credit market would subsequently correct. In total, the notional value of our corporate CDS
position exceeds the peak amount of our subprime protection by a factor of 1.5x. While we dont
expect from the corporate credit short the same level of gain that we realized from the subprime
short, we do believe a deeper credit correction can produce large gains for the funds.
Conversely, if the correction in the credit markets are less than anticipated the cost of the
protection is relatively de minimis. Our CDS exposure relative to our remaining subprime
exposure is shown below.

The above represents a partial list of deals and is presented for illustrative purposes only. There is no guarantee that in the future
these securities will be held in the Paulson funds. This material may not be distributed to other than the intended recipients.
Unauthorized reproduction or distribution of all or any of this material is strictly prohibited.

- 13 Corporate and RMBS CDS Exposure

1.80
Corporate
CDS

1.60
1.40

N o tio n a l / A s s e ts

1.20
1.00

CDS on
RMBS

0.80
0.60
0.40
0.20
Credit Funds

Long Opportunities
We constantly monitor the market for long opportunities. However, we believe initiating long
positions in the current market is premature. Anyone who has jumped in to buy either subprime,
leveraged loans, distressed debt, or bank equity securities has lost money so far as the
securities have traded lower.
However, we believe in the future there will be extremely attractive long opportunities in the debt
markets which we will be uniquely positioned to capture. In the subprime mortgage market, for
instance, there are over 1,000 different RMBS securitizations with each one divided into
approximately 18 tranches, creating over 18,000 individual securities. The chart below
highlights the enormous size of the opportunities relative to the limited capital we have under
management.
Long Distressed Mortgage Opportunities
2.5

$ 2 . 4 T rillio n

1000 subprime RMBS deals

2
- A lt -A

18 tranches per deal

18,000 permutations of securities

1.5

Universe 267x PCO fund AUM

1
- Sub p rime

0.5

- PCO

The above represents a partial list of deals and is presented for illustrative purposes only. There is no guarantee that in the future
these securities will be held in the Paulson funds. This material may not be distributed to other than the intended recipients.
Unauthorized reproduction or distribution of all or any of this material is strictly prohibited.

- 14 We estimate that the vast majority of the holders of these securities have limited ability to
analyze the securities at the loan level and merely bought the securities based on their ratings.
As the fundamentals deteriorate, we believe the $1.2 trillion subprime market and the $1.2
trillion Alt-A market will become busted markets. We anticipate there will be billions of further
downgrades of investment grade bonds to non-investment grade status forcing the sales by
holders who are restricted from holding non-investment grade securities. Estimating where the
loss will stop and which of the 18,000 tranches offers the best risk adjusted return is an
extremely complex task. Again, given our research expertise in analyzing individual securities,
we believe we will be uniquely positioned to benefit from future long opportunities in this market.

Conclusion
As investors in PCO we all have much to be grateful. We succeeded in not only avoiding one of
the greatest credit collapses in financial history but, by taking the other side, to have earned
some of the highest returns ever achieved by a hedge fund. We thank our clients for having
both the investment foresight and confidence in us as managers to allow our PCO funds to
succeed.

This material may not be distributed to other than the intended recipients. Unauthorized reproduction or distribution of all or any
of this material is strictly prohibited.

- 15 -

This material may not be distributed to other than the intended recipient. Unauthorized
reproduction or distribution of all or any of this material is strictly prohibited.
This document does not constitute an offer to sell or a solicitation of an offer to buy any securities, and
may not be relied upon in connection with any offer or sale of securities. This document should be read
in conjunction with, and is qualified in its entirety by, information appearing in the Confidential Private
Offering Memorandum (and a Limited Partnership Agreement for domestic partnerships), which should
be carefully reviewed prior to investing. Past performance is not necessarily indicative of future
performance, and although the Advantage Funds may invest in some of the same securities as the
Merger Funds, the broader strategy may result in performance that is different from that of the Merger
Funds.
An investment in a hedge fund is speculative and involves a high degree of risk, which each investor
must carefully consider. An investor in hedge funds could lose all or a substantial amount of his or her
investment. Returns generated from an investment in a hedge fund may not adequately compensate
investors for the business and financial risks assumed. While hedge funds are subject to market risks
common to other types of investments, including market volatility, hedge funds employ certain trading
techniques, such as the use of leveraging and other speculative investment practices that may increase
the risk of investment loss. Products may involve above-average risk. Risks associated with hedge fund
investments include, but are not limited to, the fact that hedge funds can be highly illiquid; they are not
required to provide periodic pricing or valuation information to investors; they may involve complex tax
structures and delays in distributing important tax information; they are not subject to the same
regulatory requirements as mutual funds; they often charge higher fees and the high fees may offset the
funds trading profits; they may have a limited operating history; they can have performance that is
volatile; they may have a fund manager who has total trading authority over the fund and the use of a
single adviser applying generally similar trading programs could mean a lack of diversification, and
consequentially, higher risk; they may not have a secondary market for an investors interest in the fund
and none may be expected to develop; they may have restrictions on transferring interests in the fund;
and may effect a substantial portion of their trades on foreign exchanges. All material is compiled from
sources believed to be reliable, but accuracy cannot be guaranteed.

- 16 -

Me r ge r Fu n ds

E v e n t Fu n ds

C r e d it Fu n ds

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

7 .2 6 %

--

--

--

--

--

--

--

--

--

--

--

--

--

- 2.74%

35.12%

7.21%

--

--

--

--

--

--

--

--

--

--

--

--

--

----

--

--

--

1 9 .4 3 %

3 5 .3 0 %

- 3.78%

----

--

--

--

9 .5 5 %

- 2 .7 3 %

- 3.92%

P C O II L

-----

--

--

1 9 .9 2 %

6 6 .8 8 %

- 3 .8 1 %

23.04%

-----

--

- 1.39%

9 .5 7 %

- 6 .3 1 %

- 3 .9 2 %

55.77%

P C O II L P

------

--

19.08%

6 6 .9 2 %

- 3 .5 9 %

2 3 .0 9 %

------

- 1.55%

5.40%

- 6 .3 0 %

- 0 .8 1 %

5 5 .8 0 %

PC O L

23.46%
10.31%
---13.14%

18.40%

23.22%

- 3 .5 9 %

3 9 .9 2 %

18.57%
14.90%
-- 7.53%
--

0.27%

8.24%

- 1.10%

- 0 .8 0 %

7 5 .6 8 %

PC O L P

1994
38.13%
- 4.42%
-11.39%
14.21%

12.80%

23.87%

- 1.43%

3 9 .9 8 %

1995
12.71%
23.97%
-45.20%
0.15%

3.45%

- 0.71%

0.81%

7 5 .7 3 %

PA P

1996
- 4.91%
24.72%
-24.21%
12.57%

13.45%

- 1.48%

18.47%

1997
23.81%
5.40%
29.60%
5.75%

4.94%

- 0.56%

0.91%

32.79%

PA PL P

1998
22.42%
5.28%
22.62%
29.99%

15.03%

- 0.10%

19.30%

1999
5.04%
20.70%
5.00%

8.88%

- 0.79%

0.66%

33.24%

PA L

2000
4.48%
12.08%
31.33%

24.69%

- 0.40%

10.19%

2001
22.69%
4.23%

8.94%
- 0.02%

0.38%

23.86%

PA L P

2002
11.92%
16.45%

24.54%
- 0.09%

11.43%

2003
3.94%

4.67%
0.23%
3.03%

22.89%

PEL

2004
16.81%

12.95%
- 0.09%
11.49%

2005

4.99%
- 0.03%
2.96%

23.62%

PPE

2006

13.29%
0.16%
11.72%

J an
- 0.13%
1.64%
24.32%

P IL

Fe b
0.12%
6.06%

M ar
1.64%
11.88%

PPL P

A pr
5.99%

YE A R

M ay
11.79%

2007

J ul

J un

4.64%

25.45%

3.66%

2 5 .4 6 %

0.67%

32.09%

4 .6 4 %

351.73%

3 .6 6 %

2 1 .6 2 %

0 .6 8 %

3 2 .1 3 %

5 .7 0 %

3 5 2 .9 2 %

4 .9 2 %
2 1 .6 5 %

0 .3 8 %

2 6 .5 1 %

5 .7 2 %

5 8 9 .6 7 %

4 .9 4 %
13.08%

0 .4 0 %

2 6 .5 4 %

3.41%

5 9 1 .3 3 %

5.76%
12.68%

2.45%

1.64%
2.59%

158.56%

4.66%
11.75%

2.04%

1.59%
4.65%

163.82%

5.14%
9.44%

1.70%

- 0.07%
4.03%

100.14%

4.75%
8.73%

1.62%

0.55%
- 0.58%

99.79%

1.09%

8.92%

1.16%

1.69%

- 0.35%

116.47%

1.08%

4.23%

0.96%

1.72%

- 0.14%

118.91%

0.45%

4.20%
0.63%

0.99%

- 0.11%
51.70%

0.47%

O ct
0.34%

0.97%

No v
51.74%

Sep

Dec

A ug

YT D

T hr e e Ye ar

O ne Ye ar

17.78%

20.40%

22.59%

51.74%

15.13%

20.02%

22.57%

51.70%

39.76%

--

44.52%

118.91%

29.24%

39.94%

43.83%

116.47%

28.65%

--

31.08%

99.79%

28.51%

--

31.30%

100.14%

45.42%

--

--

163.82%

44.80%

--

--

158.56%

--

--

--

5 9 1 .3 3 %

--

--

--

5 8 9 .6 7 %

--

--

--

3 5 2 .9 2 %

--

--

351.73%

C o mpo und A nnual G r o w t h R at e s ( as o f J anuar y 1 , 2 0 0 8 )

Fiv e Ye ar

--

L if e o f Fund

E st imat e s ar e it alicise d
1 . P P L P - P aulso n P ar t ne r s L P st ar t e d J uly 1 9 9 4
2 . P IL - P aulso n Int e r nat io nal L t d. st ar t e d M ay 1 9 9 6
3 . P P E - P aulso n P ar t ne r s E nhance d st ar t e d M ay 2 0 0 3 ( 2 X w e ig ht e d v e r sio n o f P P L P )
4 . P E L - P aulso n E nhance d L imit e d ( P E L ) st ar t e d M ay 2 0 0 1 . O r dinar y co mmo n shar e s pr e se nt e d ( 2 X w e ig ht e d v e r sio n o f P IL )
5 . P A L P and P A L - P aulso n A dv ant ag e L P and P aulso n A dv ant ag e L t d. st ar t e d A pr il 2 0 0 4
6 . P A P L P and P A P - P aulso n A dv ant ag e P lus L P and P aulso n A dv ant ag e P lus L t d. st ar t e d J anuar y 2 0 0 5 ( 1 . 5 X w e ig ht e d v e r sio n o f P A L )
7 . P C O L P and P C O L - P aulso n C r e dit L P and P aulso n C r e dit L t d. st ar t e d J uly 2 0 0 6
8 . P C O II L P and P C O II L - P aulso n C r e dit II L P and P aulso n C r e dit II L t d. st ar t e d J anuar y 2 0 0 7

The above represents the performance of all the Funds and is presented for illustrative purposes only. Performance results described herein are net of fees and expenses and assume reinvestment of dividends and capital
gains for the periods indicated. The investment strategy for the Merger Funds changed materially after 1998, since which time the Merger Funds avoided investing in event-type situations. While the Advantage Funds
may invest in some of the same securities as the Merger Funds, the broader strategy of the Advantage Funds may result in performance that differs from that of the Merger Funds. Furthermore, while the Credit
Opportunities Funds may invest in some of the same securities as the Merger and Advantage Funds, the more focused strategy of the Credit Opportunities Funds may result in performance that differs from that of the
Merger and Advantage Funds. Past performance is not necessarily indicative of returns the funds may achieve in the future.