Paulson & Co, the hedge-fund firm that made more than $3 billion betting the US housing market would collapse, may have earned more than $428 million since September by short selling UK-basedLloyds Banking Group andHBOS, according to Bloomberg.

Paulson, run by billionaireJohn Paulson, took short positions in Lloyds and HBOS valued at about £367 million (around $504 million) in September last year, based on the holdings and share prices on the dates they were reported, the news service said. The position equalled 0.79 per cent of London-based Lloyds, or 129.1 million shares, after the banks merged and holdings were diluted by a government investment. That position was worth about £56 million on 9 March, when it fell below the reporting threshold.

The ability of hedge funds to make large profits by short-selling banks explains why the “short-biased” segment of the hedge fund industry was one of the few strategies to make money in a generally poor year for hedge funds in 2008. Governments in the US, UK and other nations have restricted short selling in recent months. In the UK, for example, regulators require that hedge funds disclose more data on significant short positions.

Lloyds, which surrendered control to the government on 7 March in return for asset guarantees, has seen its shares crash by 82 per cent since Paulson first disclosed a short position in the bank. Paulson made at least £295 million by shortingRoyal Bank of Scotland Group when the fund closed its position in the bank in January after five months.

Paulson’s potential profit from shorting UK banks stands at £606 million, Bloomberg said. A spokesman for New York-based Paulson declined to comment.