“With a combined $2 trillion under management, the hedge fund industry is coming off its richest year ever — a feat all the more remarkable given the billions of dollars of losses suffered by major Wall Street banks.

In recent months, however, scores of hedge funds have quietly died or spectacularly imploded, wracked by bad investments, excess borrowing or leverage, and client redemptions — or a combination of those events.

“To some degree it’s a very gigantic version of Las Vegas,” said Gary Burtless, an economist at the Brookings Institution.

As Alpha’s list shows, managers who reap big gains one year can lose the next.

Edward Lampert, the founder of ESL Investments and a member of the 2007 Alpha list, was absent this year. His fund fell 27 percent last year, according to Alpha. About 60 percent of ESL’s equity portfolio is invested in Sears, whose shares plunged 40 percent last year. ESL is also a major holder of Citigroup, whose abysmal performance matched that of Sears.

A manager who ranked high in the 2007 list and fell off in 2008 was James Pallotta of the Tudor Investment Corporation, who was 17th last year and earned $300 million. Mr. Pallotta’s $5.7 billion Raptor Global Fund fell almost 8 percent last year, according to Alpha.

A few who did not make the cut still made buckets of money. Bruce Kovner of Caxton Associates and Barry Rosenstein at Jana Partners didn’t make the top 50. But Mr. Kovner earned $100 million, and Mr. Rothstein earned $170 million, according to Alpha. Spokesmen for the hedge fund managers either declined to comment on Tuesday or could not be reached.

Since 1913, the United States witnessed only one other year of such unequal wealth distribution — 1928, the year before the stock market crashed, according to Jared Bernstein, a senior fellow at the Economic Policy Institute in Washington. Such inequality is likely to impede an economic recovery, he said.”

More at the New York Times.

Comment

Inequality in a free market is the result (among other things, of course) of  different levels of competence and of capitalization. It’s not the essential problem.  If it’s increased tremendously, it’s because we’ve also been fiddling with the market tremendously, ostensibly to make things better, but with the opposite result.

But the crash has now given a lot of people a platform to vent.

The very people who called the market wrong (Citi, Goldman and their buddies in the regulatory business) are going to blame their incompetence on lack of regulation…. and make successful managers  pay a price. (Note that it was Goldman and Citi managers in government who helped pushed many deregulatory initiatives and changes in leverage requirements, in the first place).

I’m all for transparency, following the rules, and proper regulation.

But let’s face it.  Where we are now, more regulation isn’t going to protect the little guy or a small business from fraud. The little guys are already crushed by rules and regulations….and they’re still being defrauded. It’s just going to give one set of  big money managers yet another weapon they can use against another set of big managers. And since the guys who didn’t lose are obviously smarter than the losers, what makes anyone think they’re going to sit around and become targets?

The only reason we have such monster financial firms, anyway, is because of laws that enabled the growth of monopolies….and because we keep depreciating the cost of money through interest-rate manipulation.