August was shaping up as one of the worst months ever for some top hedge fund managers like John Paulson, but Warren Buffett may have changed that.

Buffett's $5 billion investment in Bank of America Corp sparked a rally in financial stocks on Thursday, prompting speculation that many portfolios will benefit.

Paulson's Advantage portfolios, battered for weeks by bets on Citigroup, Bank of America and Hewlett Packard, sank further into the red during the first three weeks of August. Through last Friday, the Advantage Plus fund was off about 39 percent this year, two people familiar with the numbers said.

Although Paulson had sold off a large portion of his Bank of America holdings in recent months, he still ranks as one of the bank's 20 largest shareholders; the stock's strong rise Thursday was no doubt welcome.

Earlier this month, the sell-off in financial stocks, fueled by fears about the sluggish U.S. economy and Europe's debt crisis, also dented William Ackman's Pershing Square Capital Management. Midway through August, Ackman -- who counted Citigroup as its fifth-largest holding at the end of the second quarter -- was down 11 percent, people familiar with the numbers said.

Lee Ainslie's Maverick Capital, which counted JPMorgan Chase and Citigroup among its 10 biggest holdings at the end of the second quarter, was down nearly 10 percent in the first two weeks of August, leaving it in the red for the year with an 8 percent loss, according to sources familiar with the data.

We are seeing a wide array of results this month and performance has centered mainly on managers' exposure to financial stocks, with those who were long financials taking the biggest hits, said Stewart Massey, who invests with hedge funds at Massey, Quick & Co.

The average hedge fund is off 4.02 percent this month, the steepest monthly decline since the financial crisis, Hedge Fund Research data show. For the year, the average fund has lost 6.5 percent, more than the broader market's roughly 5 percent drop.

Buffett may now provide a silver lining by rescuing some of these ailing portfolios.

There may be a fairly significant short squeeze on financial stocks now, and that could improve performance dramatically, Massey said.

Even before Buffett's endorsement of Bank of America, some investors had managed to right the ship after a rocky start.

Paul Tudor Jones, who nursed losses earlier in the year, told clients his flagship fund was up 3.2 percent in the first three weeks of August, leaving it up 1.1 percent for the year. The secret to his gains: bearish bets on some stocks plus holdings of gold as the metal shot higher.

Indeed, investors say that apart from a few big losers who are making headlines, most hedge funds are doing what they are meant to do and there isn't any big wave to exit funds.

Big-name investors and banks who have been keeping tabs on who has been hit with withdrawal requests report redemptions have not spiked dramatically this month. Investors had until the middle of the month to give notice to fund managers who set their withdrawal deadlines 45 days before the end of the quarter.

(Reporting by Svea Herbst-Bayliss; editing by John Wallace)

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