John Paulson cites high risk reward potential on deals such as Shire

While the risks in these investments are higher than the risks of announced deals, we attempt to mitigate the downside by choosing targets that trade at discounted valuations and that could rise even if no takeover occurs, as well as by either partially or fully hedging the market exposure by shorting sector ETF's and/or individual stocks against the longs. Although the risk is greater and the outcomes are less certain, the rewards can be high.

Shire withdrawal hurts Paulson

Hedge fund billionaire John Paulson is getting whacked on his hedge fund's largest equity investment, the biotech company Shire. 

Shire plunged 23% in London, the Chicago-based pharmaceutical company AbbVie said it was reconsidering its $55 billion takeover bid of the Ireland-based Shire, Reuters reported.

Paulson still wants AbbVie to pursue its takeover of Shire. He owns 13 million shares of AbbVie.

"We believe this transaction creates enormous value for AbbVie shareholders. The combination is both strategic and accretive regardless of the tax considerations," the fund said in a statement emailed to Business Insider. "As a large AbbVie shareholder we hope the Abbvie Board reaffirms its commitment to the transaction after its review."

Merger arbitrage is Paulson's main specialty.