Quite literally. Here's Alpha Magazine's list of the ten hedge fund managers with the highest personal earnings in 2007:
| Rank | Name | Firm Name | 2007 Earnings* |
| 1 | John Paulson | Paulson & Co. | $3.7 billion |
| 2 | George Soros | Soros Fund Management | $2.9 billion |
| 3 | James Simons | Renaissance Technologies | $2.8 billion |
| 4 | Philip Falcone | Harbinger Capital Partners | $1.7 billion |
| 5 | Kenneth Griffin | Citadel Investment Group | $1.5 billion |
| 6 | Steven Cohen | SAC Capital Advisors | $900 million |
| 7 | Timothy Barakett | Atticus Capital | $750 million |
| 8 | Stephen Mandel Jr. | Lone Pine Capital | $710 million |
| 9 | John Griffin | Blue Ridge Capital | $625 million |
| 10 | O. Andreas Halvorsen | Viking Global Investors | $520 million |
*Earnings include managers' shares of fees as well as gains on their own capital.
So how did they do it? This article in The Washington Post explains:
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[John] Paulson's feat was even more astonishing because he started 2007 managing $6 billion, not a massive pool of money by hedge fund standards. Over the course of the year, one of his funds earned a whopping 590 percent return, and another soared 353 percent, according to Alpha. By the end of December, his funds' assets were worth $28 billion.
He amassed his winnings by "shorting" securities linked to subprime mortgages. In a short sale, the investor borrows securities -- in this case, subprime mortgages that were widely held by banks, brokerages and other investors -- and sells them to another buyer. Later, the investor must buy those securities back and return them to the original lender. As the subprime market collapsed, the value of the securities fell, and Paulson was able to pocket the difference. The lenders were stuck with the losses.
Several hedge fund managers, including Philip Falcone, who has been challenging the board of the New York Times Co., also profited from the mortgage crisis by betting that subprime debt securities would plunge in price. Falcone earned $1.7 billion last year. Others made fortunes by betting that the prices of commodities such as oil, sugar and corn would rise.
As I've blogged before, the returns to being confident, contrarian, and accurate can be extremely large. I don't begrudge them a dime of their earnings, but there is no excuse to have their fees treated as capital, rather than ordinary, income for tax purposes.