It was the greatest opportunity of his career, hedge fund manager John Paulson told investors in 2006.

And so Mr Paulson raised a dedicated $1bn fund to profit from problems he predicted in the US subprime home loans market.

Just over 18 months later, the bet has paid off handsomely for his investors, his firm and, most spectacularly, himself.

Mr Paulson's Credit Opportunities I fund leapt 550 per cent from January until the end of October, making it one of only 30 last year to more than double investors' money, according to Chicago-based Hedge Fund Research.

"There's never been a trade of this size of profit in the history of financial markets," says Arki Busson, chairman of EIM Group, which has $13bn invested in hedge funds.

Three of Mr Paulson's other funds more than doubled their money, giving New York-based Paulson & Co a spectacular set of returns and an appeal to investors that propelled it from a mid-ranking firm to one of the world's biggest hedge fund managers.

Investors estimate that across all its funds Paulson & Co has secured profits from subprime of more than $12bn.

At the same time, the merger arbitrage and event-driven investment on which the firm was built have been producing strong returns.

Mr Paulson was not the only manager to spot the money-making potential of shorting subprime, a complex trade that involves buying insurance through derivative markets on a selection of low-rated tranches of mortgage securities. But he is likely to be the best paid.

Fees on the funds have not yet crystallised, but his investors expect him to have earned $2bn to $4bn in 2007 - and they do not begrudge him a penny.

Is it too late for investors who missed out on last year's gains to make money from the subprime crisis?

The answer is probably "yes" - at least directly.

"The risk-return characteristics are far less attractive than in the past," says Andrew Lahde in a recent monthly report for his Lahde Capital.

Lahde's short residential property fund was up 1,000 per cent at one point in November, before ending the year up 886 per cent, thanks to the subprime crisis, to become one of the best-performing funds of all time.

It has returned about half its money to investors, but Mr Lahde has told customers to expect further gains.

"Fundamentals couldn't be much worse," he wrote of the US mortgage market. "Then again, fundamentals will likely continue to deteriorate, which is why we are still short."

Meanwhile, Mr Paulson has cashed in some positions, investors say, and moved money to short securities of financial institutions such as bond insurers and banks instead, aiming to profit from the general financial malaise.

Mr Lahde is raising a new fund to take more general short positions, predicting a deep US recession from which he hopes the fund will profit.

He has also raised the prospect of using the skills the firm has built up in the area to select and buy mortgage securities which are underpriced.

Many hedge funds are taking similar approaches to profit from the problems of the financial sector.

Well-known equity funds such as London's Odey European and Lansdowne UK Equity are selling short financial-sector shares in trades designed to profit from the difficulties of banks and insurers.

Many credit funds are trying to find other low-risk ways to profit from the turmoil in subprime.

They are avoiding pure bets against mortgage securities - seen as increasingly risky - in favour of "relative" bets, against the worst but in favour of better credits.

Still, with three awards late last year confirming Mr Paulson as the latest hedge fund star, the competition is unlikely to prevent him securing as much money from investors as he needs.