New York, April 16: Hedge fund managers, those masters of a secretive, sometimes volatile financial universe, are making money on a scale that once seemed unimaginable, even in Wall Street’s rarefied realms. One manager, John Paulson, made $3.7 billion last year. He reaped that bounty, probably the richest in Wall Street history, by betting against certain mortgages and complex financial products that held them.

Paulson, the founder of Paulson & Company, was not the only big winner. Hedge fund managers James H Simons and George Soros each earned almost $3 billion last year, according to an annual ranking of top hedge fund earners by Institutional Investor’s Alpha magazine. Hedge fund managers have redefined notions of wealth in recent years. And the richest among them are redefining those notions once again.

Their unprecedented and growing affluence underscores the gaping inequality between the millions of Americans facing stagnating wages and rising home foreclosures and an agile financial elite that seems to thrive in good times and bad. Such profits may also prompt more calls for regulation of the industry.

Even on Wall Street the size of winnings makes some uneasy. “There is nothing wrong with it — it’s not illegal,” said William H Gross, the chief investment officer of the bond fund Pimco. “But it’s ugly.” The richest hedge fund managers keep getting richer — fast. To make it into the top 25 of Alpha’s list, the industry standard for hedge fund pay, a manager needed to earn at least $360 million last year, more than 18 times the amount in 2002. The median American family, by contrast, earned $60,500 last year. Combined, the top 50 hedge fund managers last year earned $29 billion. That figure represents the managers’ own pay and excludes the compensation of their employees. Five of the top 10, including Simons and Soros, were also at the top of the list for 2006. To compile its ranking, Alpha examined the funds’ returns and the fees that they charge investors, and then calculated the managers’ pay.

Top hedge fund managers made money from investing in overseas stock markets to betting that prices of commodities like oil, wheat and copper would rise. Some, like Paulson, profited handsomely from the turmoil in the mortgage market ripping through the economy.

As early as 2005, Paulson began betting that complex mortgage investments known as collateralised debt obligations would decline in value, much as Wall Street traders bet that shares will drop in price. By the end of 2007, Paulson sat atop $28 billion in assets, up from $6 billion 12 months earlier. Soros, one of the world’s most successful speculators and richest men, leapt out of retirement last summer as the market turmoil spread - and he won big. He made $2.9 billion for the year. Simon, a mathematician and former US Defence Department code breaker who uses complex computer models to trade, earned $2.8 billion. His flagship Medallion fund returned 73 per cent. Like Paulson, Philip Falcone, who founded Harbinger Partners with $25 million in June 2001.

Hedge fund managers share their success with their investors, which include wealthy individuals, pension funds and university endowments. They typically charge annual fees equal to 2 per cent of their assets under management, and take a 20 per cent cut of any profits.

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