Billionaire investor John Paulson's bet that the economy will rebound paid off handsomely last year when his hedge fund clients earned about $1 billion on his Citigroup Inc stake.

Paulson, who oversees about $35 billion at Paulson & Co, told investors that his bet on the bank proved to be the year's most profitable investment, said one investor, who declined to be identified because clients may not speak publicly about their returns.

Known for making big, contrarian calls, Paulson said early in 2010 that he expected to see strong economic recovery and a rebound in housing prices. He also made a big bet on gold.

Over the last 52 weeks, Citi's share price has gained about 50 percent.

For much of 2010, many hedge fund managers were thrown off by volatile markets, Europe's growing debt crisis and the uncertainty of the U.S. economy. Paulson's main funds nursed losses early in the year and industry analysts wondered whether he had lost his golden touch.

Late in the year when then stock market rose, his funds swung from losses to double digit gains.

Ever since Paulson earned $15 billion on his bet against the housing market in 2007, investors have treated him as a bellwether.

His Paulson Advantage Plus Fund ended the year up 17 percent after rising 13 percent in December. His Gold fund gained 35 percent for the year.

(Reporting by Svea Herbst-Bayliss. Editing by Robert MacMillan)

Citigroup