By Amy Or 
 

NEW YORK--Billionaire hedge-fund manager John Paulson's gold fund declined by 12.7% last month as the price of gold dropped, bringing the fund's losses so far this year to 22.5%, a person familiar with the situation said.

But in a letter that Paulson & Co. sent to investors Tuesday, along with the performance numbers, the hedge-fund manager said the trade has reversed lately.

"Gold equities proved to be a meaningful counterbalance to the market's downward move during the second half of the month and into early June," it said.

Gold futures fell 6% over the course of May, slashing prices by around $100 a troy ounce, in the biggest monthly percentage drop in gold since December 2011.

The sharp gold-price movement came at a time when Paulson & Co. invested in gold-related equities, believing there was "significant undervaluation of gold equities relative to gold prices." That trade contributed to May's decline.

In its quarterly filing on stock holdings for the first quarter, Paulson & Co. said it held stakes in gold-related companies Allied Nevada Gold Corp. (ANV), Anglogold Ashanti Ltd. (AU), Barrick Gold Corp. (ABX) and exchanged-traded fund SPDR Gold Trust (GLD) as of March 31.

Paulson's Advantage fund, an event-driven fund that seeks to profit from takeovers and other activities, has about a quarter of its assets in gold-related investments, including equities, physical gold, and gold-related derivatives. The fund posted a 0.32% decline in May, less than the Standard & Poor's 500 Total Return Index's 6.0% loss for May. Its year-to-date decline stood at 6.27%.

The letter said Advantage Fund's gold exposure helped to mitigate broad market losses during the second half of May. The fund gained 2.1% solely on its gold-related investments between May 15 and June 1, when the S&P index was down 4.5% during the period.

--Tatyana Shumsky contributed to this article.

Write to Amy Or at amy.or@dowjones.com.