Hedge fund manager John Paulson, long lionized for his successful bets on the collapse of the subprime mortgage market and the surge in gold prices, is now facing the toughest challenge of his career.

With one of Paulson's largest funds down nearly 50 percent for the year and several others also posting big losses, the big question is whether the manager's large and wealthy fan base will scurry for the exits and seek to redeem billions of dollars by year's end.

There will be a lot of internal discussion at big and small investors alike about the allocation to John Paulson and whether to redeem it or to keep it, said Professor Jim Liew, who teaches hedge fund strategies at New York University's Stern School of Business.

A spokesman for Paulson, who is scheduled to have a conference call on Tuesday with investors to discuss Paulson & Co's dismal third-quarter results, declined to comment.

Most investors have until October 31 to submit a redemption notice for the manager's largest funds -- the Paulson Advantage and Paulson Advantage Plus. So it is still too early to know just how much money investors will seek to pull.

This year alone, Paulson's assets have fallen from a peak of $38 billion to a little under $30 billion because of investment losses and earlier redemptions.

So far, Paulson has sent signals to his investors that redemptions have been coming in at slower pace than a year ago, when the main Advantage fund was up 11 percent while the Advantage Plus fund gained 17 percent.

Some Paulson investors, who declined to be identified, also pointed out that even in years when Paulson was one of the $2 trillion industry's top performers, he has been asked to give money back.

In 2008, a year when Paulson's Advantage Plus fund rose 37 percent, the manager returned more than $10 billion to investors, people familiar with his firm said. That was the year, of course, that Paulson cashed in on his big bet that the subprime mortgage market would collapse.

Ironically, Paulson's troubles now look a bit like the misfortune that has hit Philip Falcone and his Harbinger Capital Management, another hedge fund that rose to fame on the subprime trade and has now fallen on hard times. Harbinger Capital, which once managed over $26 billion, is now down to about $4.5 billion assets under management.

NO MORE MONEY

But what will be different this year is that Paulson will likely not be able to count on a big rush of new money coming into his firm through banks' wealth management platforms, which have been active sellers of the Advantage funds in the past.

There is no new money coming in this year, said one person who follows the hedge fund industry closely but is not permitted to speak publicly about individual funds. Several industry investors noted that Wall Street firms tend to be unforgiving if they were seduced by a manager's enormous returns but got in just after the big so-called Alpha moment.

The firm gathered so many assets following a classic pattern: investors pile into a manager after they've had a stellar year. But past returns are not necessarily related to future ones, as we've seen with Paulson and many others, and more assets actually make putting above-market returns on the table more difficult, said Adam Zoia, chief executive of Glocap, which tracks the hedge fund industry.

When Paulson holds his call with investors on Tuesday to explain what happened in the third quarter, clients will be ready with a battery of questions ranging from how much money Paulson personally lost during the last turbulent weeks to what his outlook is for the economy.

It would seem that the biggest issue Paulson has is that he has no repeatable global macro investment process, as the issues we are facing now are eerily similar to 2008, but he interpreted them in two different ways, said Daryl Jones, Director of Research at Hedgeye Risk Management, which sells investment research to hedge and mutual funds.

TOUGH CALL AHEAD

NYU's Liew added, He's going to be beaten up like crazy on the call.

No matter what, many on Wall Street are expecting Paulson's assets under management to shrink dramatically over the next months. Already, some on Wall Street are beginning to point fingers at Paulson, blaming selling by his funds for bigger-than-normal stock drops in companies like Bank of America , Transocean Ltd and AngloGold Ashanti Ltd .

Still, some Wall Street brokers with clients invested in Paulson are saying now is not the time to bail on him -- the losses are so steep, and the odds are, he has nowhere to go but up.

(Additional reporting by Katya Wachtel; Editing by Gary Hill)