In its year-end letter to clients, hedge fund guru John Paulson’s firm says it’s focusing on equities of firms that have gone through restructuring, and says that we’re in “the part of the cycle where we want to have long event exposure and do not want to be under-invested.” (Paulson Funds’ emphasis; a tip of the cap to Zero Hedge for posting a copy of the letter.)

“We have spent the last year-and-a-half making restructuring investments in high quality assets at deeply distressed prices to maximize gains in an economic recovery,” the letter states. (Before that, Paulson made huge gains by being one of the few to foresee the U.S. housing collapse.) “In total, we’ve invested over $20 billion in more than 40 different transactions.

“Now that these companies have repaired their capital structures,” it continues, “their equity offers substantial upside appreciation relative to downside risk as we move toward economic normalization.”

Paulson Funds notes that the U.S. equity risk premium — the spread between equity yield and Treasury yield — has recently been the highest in more than 50 years. It also points to strong corporate earnings and the extension of the Bush-era tax cuts as reason for bullishness. “We believe the U.S. economy is recovering and we anticipate continued growth,” the letter says, adding that the group thinks GDP growth will accelerate.

The letter also says that, while inflation is currently low, the group is concerned that the Federal Reserve’s policies will lead to inflation down the road.