Paulson & Co is demonstrating its fidelity to traditional hedge fund principles by taking a "calculated" risk in examining opportunities in the financial sector, although the industry is still weighed down by the negative impact of the credit crunch.

The New York hedge fund manager that shot the lights out last year by shorting the sub-prime mortgage market will weigh buying shares or convertible bonds in banks and other financial institutions that need capital, according to the Financial Times reported, and has told investment bankers it would consider backing rescue recapitalisations of troubled institutions.

John Paulson, founder of the USD35bn firm, told clients on a conference call last week that he remained extremely bearish but that he was prepared to take long positions in mortgage securities, banks and finance houses as prices fall to his target levels.

Paulson will launch his Recovery fund on October 1 and will immediately allow clients to switch money from the hugely successful USD11bn billion Credit Opportunities funds. Investors in the two funds, which made 590 and 352 per cent returns last year, would otherwise have to wait until the end of the year to move their money.

Although Paulson has not altered his negative views on the global economy and financial sector, nor his prediction of USD1.3trn in credit losses worldwide, his readiness to go long on the financial industry may well inspire others to do likewise.