Hedge funds are an investment vehicle typically used by larger investors, such as banks, pension funds, and large foundations. Investment in a hedge fund is limited by law and by regulation, but in return, the hedge fund is allowed broader freedom in its choice of investment vehicles. Hedge funds also utilise advanced trading strategies, such as short sales, leverage, and forex or foreign exchange trades.

Managers of hedge funds are typically compensated via not only a management fee, similar to a salary, but also a performance fee based on the performance of the hedge fund. Of course, hedge funds have many more employees than just the manager. Analysts, accountants, portfolio managers and many other junior and clerical employees are paid well, but nowhere near the level of the fund manager. Of course, the fund manager is ultimately responsible for the end result, and his or her job is usually on the line if the fund does not perform well. The fund manager needs to have exceptional knowledge of several areas of the market and to be able to time investments and leverage money. The compensation of fund managers has come under increasing scrutiny in recent years.

Payouts to these managers that rose, even when the hedge fund did not perform well, made headlines because of the level of compensation. For example, 2009 was not a stellar year for investors, but hedge fund managers did not seem to feel the pain like others. David Tepper of Appaloosa Management earned approximately $4bn, George Soros of the Soros Fund earned approximately $3.3bn, James Simons of Renaissance Technologies was paid approximately $2.5bn, and John Paulson of Paulsen Hedge Fund made $5bn. Not all of this compensation was in cash, of course. Much of it is reflected as a measure of their stake in the fund they manage.

Even junior managers at hedge funds can do very well; in 2008, the average earnings for a junior portfolio manager were $152,744 with an additional year-end bonus of $492,819; senior managers averaged $182,019 as a salary base and they were rewarded with an additional $431,275 at the end of the year. The top 25 hedge fund managers in that same year earned an average of $464m each, which includes not only their base compensation but also their year-end performance bonuses.