For those who love to hate the rich (and really, who doesn't?) there is a new pinnacle of personal abundance on whom to focus our disdain. Forget Tiger Woods and his US$100 million-plus in endorsement deals. Forget Oprah and the estimated US$225 million she pulls down annually from her television empire. Steve Jobs and his US$646-million windfall from Apple Computer last year? J.K. Rowling? Alex Rodriguez? Frank Stronach? Punters, all of them.

The modern day King Midas is named John Paulson, and unless you live in the rarefied atmosphere of Wall Street, chances are you've never heard of him. Paulson is a former investment banker who now runs his own hedge fund firm, and last year took home an estimated US$3- billion pay package. That's US$26 for every single household in America, or 13 times what Oprah made. It's enough to buy the Dallas Cowboys, Los Angeles Dodgers and New York Rangers, and still have half a billion left over for hot dogs.

Naturally, this news was greeted with stunned admiration in the financial business. But in the rest of the world, where millions are facing the threat of foreclosure, unemployment or both, the reaction was decidedly less enthusiastic. To walk away with that kind of fortune, when so many are suffering, it just seems ugly somehow. The headline on one U.K.-based financial website reflected the public's dim view of hedge funds: "Hedgies profit from turmoil."

And, in fact, that's absolutely correct. Hedge funds make their biggest money in the midst of the greatest volatility, when fear is everywhere and markets are in flux. Lately, with oil prices soaring and house prices collapsing, hedge funds have made a killing. According to Trader Monthly magazine, at least 100 U.S. hedge fund managers topped US$75 million in personal income last year.

Paulson trumped them all by laying a huge bet that millions of American homeowners were about to find themselves in deep financial trouble. He looked at the frenzy of sub-prime lending that swept the United States between 2002 and 2007, and he bet on a crash. But, as Paulson told an interviewer last year, betting against the housing market isn't as simple as short-selling an overpriced stock. His firm looked for the sketchiest mortgages and bought so-called credit default swaps — contracts whose value rises along with the risk that homeowners will default on their debt payments. When the credit crunch hit in late 2006, Paulson's clients hit a spectacular jackpot. Last year alone, his funds increased in value by US$15 billion. The firm's total assets quadrupled in 12 months.

There are many who will reflexively point to Paulson's success as yet more evidence that the hedge fund sector is somehow predatory. In reality, it is just the opposite, and it's time we dispensed with the knee-jerk disapproval that continues to dog the industry.

There is no denying that Paulson's good fortune was predicated on the misfortune of others. He bet that the Titanic wouldn't make it to New York, but it's not like he was piloting the iceberg. He just did a better job reading the charts and kept a more vigilant watch than anyone else. In that sense, hedge funds like Paulson's play an essential role in the capital markets. They serve as a counterbalance to Wall Street's hype machine and the enormous sales apparatus that inflates one asset bubble after another — whether it's Internet stocks, fibre optic cables or cheap mortgages. It's no accident that several of the biggest stock swindles in recent memory — hello Enron! — were first sniffed out by hedge funds looking for stocks to sell short.

You might be astonished, even offended, by the magnitude of the profits in the business, but there's nothing unfair about them. Paulson's take, huge though it is, represents only a slice of a much bigger fortune he made on behalf of his clients. For every dollar he pocketed, his investors got $4, and those clients knew exactly how the spoils would be divided before they invested a dime.

The hedge fund industry's general guideline is known as the "two-and-20" rule: managers take home two per cent of the funds' assets at the end of each year and/or 20 per cent of any profits. New funds might demand less in order to attract investors, while the most successful managers can sometimes demand more. But it's all out in the open and you can bet that after last year's windfall, investors will be lining up to give Paulson more money in hopes that lightning will strike twice.

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