Almost every strategy lost money in May, according to Hedge Fund Research Inc. in Chicago, as the Dow index of 30 big stocks sank 7.6 percent including dividends amid speculation that Greece’s debt problems would spread to nations such as Spain and Portugal. Some of the best-known funds saw their gains for this year erased.

John Paulson’s fund lost 6.9 percent through May 21, bringing its year to date loss to 3.3 percent. Halvorsen’s Viking Global fund fell 3.4 percent in the same span and 2.9 percent for the year. Bacon’s Moore Global declined 7.7 percent as of May 20 and 4.8 percent in 2010, investors said. Representatives for these funds declined to comment. Paulson, Halvorsen and Bacon have among the best long-term returns in the industry, each with average gains of 20 percent or more since inception.

SAC capital also suffered losses, but only 2.9 percent, reducing this year’s gain to 4 percent. Citadel is said to have lost 2 percent and Brevan Howard .1 percent, respectively.

The measures many managers, including Paulson, Halvorsen, and Bacon, put in place to hedge against falling markets didn’t work. Their bets on falling stocks didn’t make enough money to counter losses in shares the managers expected to climb. Commodities lost heavily in may, taking losses of 8.2 percent according to the UBS Bloomberg CMCI Index. In addition, those expecting economic growth suffered losses when the difference between payouts on two-year and 10-year Treasury notes narrowed instead.

A few funds actually gained. Among them, notably Caxton Associates LLC rose 1 percent as of May 21 and was up 4.5 percent for the year. Autonomy Capital Research LLP gained .7 percent and is up 12.5 percent for the year.

Robert Gibbins, manager for the $1.5 billion firm, said his trades were based on the forecast that global economies won’t improve until currencies are better aligned, and in particular Chinese officials agree to let the yuan strengthen, he said.

Gibbins said his profitable trades included wagers that the S&P 500 would fall and that interest rates in a number of countries would slide.

BAM Capital LLC, a $300 million hedge-fund firm in New York that bets on price volatility, returned 7.7 percent last month through May 21 with its main BAM Opportunity Fund LP, bringing its gain for the year to 8.2 percent, according to an investor.

However, despite a turbulent May, price swings haven’t changed managers’ attitudes views on whether the global economy is in trouble or recovering.

According to Politico,

The heart of the matter was whether Goldman Sachs intentionally sold complicated financial products that it knew would fail – or had designed purposely to do so. Goldman strenuously denies this allegation.

But Levin conjectures that Goldman continues to deny the allegation because “the firm cannot successfully continue to portray itself as working on behalf of its clients if it was selling mortgage related products to those clients while it was betting its own money against those same products or the mortgage market as a whole.”

Goldman Sachs’s Chief Risk Officer Craig Broderick begs to differ, however. He basically says that it’s not Goldman’s job to tell its clients whether investments are smart or not– it simply makes the investments possible. Or, as Politico quoted: “Our clients expect us to facilitate transactions for them in all market conditions,” Broderick said in prepared testimony. “As such, the better we understand and can manage risk, the more willing and able we are to transact with clients, regardless of our views on the markets.” Sort of valid argument, I guess. Doesn’t directly address the Paulson issue/the fact that they knew Paulson created the CDOs he was betting against and then they profited off the deal, but whatever.

Next up: Tourre. One of the most anticipated witnesses of the afternoon. For his part, Tourre said “I deny — categorically – the SEC’s allegation. And I will defend myself in court against this false claim.” In the hearing, Tourre sought to portray himself as a simple middleman, but it’s pretty clear from every other article/interview ever done on Tourre that he was the brains behind the operation. And yet, he claimed, “I was an intermediary between highly sophisticated professional investors — all of which were institutions. None of my clients were individual, retail investors.” That may, perhaps be true. His investors may well have been highly sophisticated (as institutional investors with billions of dollars tend to be), but that doesn’t mean that Tourre himself was some idiot just pushing papers.

Regarding the specific allegation that Tourre set up the Abacus deal without revealing that a hedge fund, Paulson & Co., which was involved in selecting the assets at the heart of the transaction, was betting against the mortgages tied to the CDOs selected. Tourre said:

I never told ACA, the portfolio selection agent, that Paulson & Company would be an equity investor in the AC-1 transaction or would take any long position in the deal. Quite frankly, I am surprised that ACA could have believed that the Paulson fund was an equity or long investor in the deal. The AC-1 transaction was not designed to fail.

When asked about how the release Tourre’s personal emails to his girlfriend and others had been released by his own employer made him feel, Politico reports that Tourre responded, “I regret these emails. They reflect very bad on the firm and myself,” Tourre said. “I wish I hadn’t sent those.” Subcommittee’s ranking Republican Sen. Tom Coburn (R-OK), rightly thinking such a response sounded a little canned, inquired as to how many lawyers had helped the Fabulous Fab (as he referred to himself in emails) and he replied that he didn’t know. When asked if Goldman was paying for his counsel, he answered in the affirmative. Shocking.

When questioned about Goldman’s responsibility for the financial crisis of 2008, Goldman mortgage executive Michael Swensen asserted,

We did not cause the financial crisis. I do not think that we did anything wrong. There’s things that I think we could have done better in hindsight.

The entire day boiled down to this: the highly coached Goldman execs gave up nothing. They were at turns incredulous, puzzled, and even “hurt” by the accusations leveled against them, but at no time did they admit to anything. They very slowly and very deliberately responded to every question asked to run out the clock on each questioner’s time limit, as Sen. Susan Collins (R-ME) astutely observed at one point, and categorically denied any wrongdoing. They were professionally coached within an inch of their lives (well, as well as they could be on such short notice). And as the Senators’ collective frustration mounted, the obscenities flew. It’s a shitty situation… because the Senators recognize what’s at stake here. At stake is more than just the reputation of one of the largest, most important financial investment institutions in the world. And, of course, there are potential jail sentences to be served and millions if not billions to be repaid in reparations if Goldman is found guilty of civil fraud. But more importantly, at stake is fate of the crucial financial reform legislation which is currently stuck on the Senate floor thanks to a filibuster by Republicans seeking to alter the proposal.

According to Politico,

Democrats are trying to portray Republicans as the party doing Wall Street’s bidding, and hope that revelations about Goldman Sachs’ conduct will put political pressure on GOP senators to reverse course on the sweeping regulatory bill.

We’ll see in the coming days and weeks if there is any change in the Republicans’ tune.

Paulson, though his reputation has been slightly tarnished in association with all of this, is not being charged and, for his part, maintains that his firm’s role in the transaction “was appropriate and conducted in good faith. We have always been forthright in expressing our opinions, and we have never misrepresented our position.”

If Pellegrini is telling the truth, this takes a little wind out of the government’s sails.

According to the LA Times, the government complaint alleges that Goldman led ACA to believe that Paulson was going to bet long on the CDOs he was creating. “Had ACA been aware that Paulson was taking a short position … ACA would have been reluctant to allow Paulson to occupy an influential role in the selection of the reference portfolio,” the government’s suit says. Paulson and ACA had numerous meetings during which they discussed which mortgages would go into the Abacus-2007-AC1 deal, the suit alleges. Pellegrini, however, contends that during at least one of these meetings Paulson advised ACA that he was going to take a short position in Abacus. Separate from the allegation dealing with ACA, the government’s lawsuit alleges that Goldman should have disclosed Paulson’s role to the investors in the deal. Goldman denies it was required to do that. Whether or not this will be enough evidence to find Goldman guilty of civil fraud remains to be seen.

Here’s a short guide to telling the difference between two of the biggest names in finance:

* Early Years: Henry (Hank) Paulson was born in Palm Beach, FL, later moved to Barrington, IL, and went to Dartmouth undergrad where he was an ΣΑΕ (ΦΑ, gents) and also graduated Phi Beta Kappa and was All Ivy, All East, and honorable mention All American in Football. He went on to receive a Harvard MBA. John Paulson was born in Queens, NY and went to NYU undergrad where he graduated valedictorian of his class. He went on to receive a Harvard MBA where he was designated a Baker Scholar.

* Career: Hank Paulson was Staff Assistant to the Assistant Secretary of Defense at The Pentagon from 1970 to 1972. He then worked for the administration President Richard Nixon, serving as assistant to John Ehrlichman from 1972 to 1973, during the Watergate scandal for which Ehrlichman was convicted and sentenced to prison. After that, he joined Goldman Sachs and rose through the ranks, eventually becoming CEO from 1999-2006, after which he left to become US Secretary of the Treasury.

* Career: John Paulson began his career at Boston Consulting Group before leaving to join Odyssey Partners. He later worked in M&A at Bear Stearns, then became a partner at the mergers arbitrage firm Gruss Partners LP. In 1994, he founded his own hedge fund (Paulson & Co.) with $2 million and two employees (himself and an assistant). Paulson & Co. is now the world’s third largest hedge fund, with $32 billion in assets under management, thanks in large part to its successful bet on the housing market crash.

*Run-ins with the SEC: John Paulson’s name popped up in connection with civil fraud charges filed against Goldman Sachs and VP Fabrice Tourre last Friday. According to the charges, Goldman and Tourre allegedly misstated and omitted the fact that the CDOs they were marketing to investors as the housing bubble was bursting were tied to subprime mortgages that Paulson had helped create and recommend to Goldman– mortgages which he later bet against by buying credit default swaps, garnering over $1 billion for himself and $3.7 billion for his firm. Although Paulson was not named in the suit and Goldman denies all wrongdoing, reputations have been dragged through the mud. Hank Paulson, meanwhile, allegedly received a tip from GE in 2008 that it was having trouble selling debt and the SEC has taken an interest in why the company shared this info with the Sect. of the Treasury and no one else, particularly because it has been suggested Paulson profited from this information.

*Wealth: Hank, by no means poor, has amassed a fortune of somewhere in the vicinity of $700 million, according to various web sources. However, John’s hedge fund paydays put his net worth somewhere in the $12 billion range. He is ranked #45 on Forbes list of the World’s Richest People.

*What They’ll Be Remembered For: Hank Paulson is most famous for his service as the US Secretary of the Treasury and his handling of the financial crisis– specifically TARP and bailouts of “too big to fail” firms. John Paulson is most famous for his financial prowess and huge accumulation of wealth through operation of his hedge fund– though, now, he will probably also be remembered for his role in betting against the housing market.

Apparently the SEC doesn’t have enough to go to trial against Paulson… because technically there is nothing illegal (though the words “douche-y” and “unethical” come to mind) about going to Deutsch and Credit Suisse Bear Stearns and Goldman and asking them to create a toxic mortgage product just so he could bet against it. And a statement from Paulson & Co. quoted in the New York Times has emphasized that the firm was “not involved in the marketing of any ABACUS products to any third parties,” and that the deal’s CDO manager and not Paulson “had sole authority over the selection of all collateral in the CDO, securities of which were subsequently rated AAA by both S&P and Moody’s.” But the SEC is pursuing the case against Goldman and Tourre– because the the public bloodlust demands that someone pay. Goldman is saying the charges are unfounded and vowing to fight them and defend its reputation. Right.

The whole thing is pretty simple: Goldman (like other firms who will probably emerge as part of a similar investment scheme betting on the housing downturn and be charged later– Soros Asset Mgmt. and Magnetar profited from similar deals, but don’t appear to have had any special relationships with investment banks that have been discovered thus far) teamed up with one of its most valued hedge fund clients to create subprime mortgage products the hedge fund would later bet against. And the SEC, like many others, feels that Goldman and Tourre owe investors more than just a “my bad”.

The SEC maintains that Goldman should have told investors that the product they were being sold was linked to the performance of certain mortgages and that the hedge fund betting on the mortgages’ demise helped design the product. In fact, Goldman brought in a third party, ACA Capital, to manage the deal named Abacus 2007-AC1. So Goldman told investors that ACA was responsible for picking the bonds– not Paulson. The SEC says this is enough to support civil fraud charges. When this was announced on Friday, Goldman’s stock dropped some 13 percent, while the stock of several of the underwriters of those mortgages, such as Deutsch, Morgan Stanley, and Bank of America, which owns Merrill Lynch, and Citigroup, dropped 9 percent, 6 percent, 5 percent and 5 percent, respectively.

Deutsche Bank AG, UBS AG and Merrill Lynch & Co. are among those firms that created mortgage deals that went sour. It is not yet known who the SEC is investigating. Traders say that the deals generated about $1 billion in total fees for the firms. Investors in the CDOs Paulson helped create/Goldman sold ended up losing $1 billion in what was one of the worst-performing deals of the housing-crisis. Paulson & Co. walked away with something like $3.7 billion in 2007 by betting against the housing market, according to the LA Times. Turns out Paulson really knows how to pick ‘em. According to the Wall Street Journal, future cases may hinge not just on questions such as whether a deal favored one client or another, but whether there was misrepresentation.

A critical part of the SEC’s case against Goldman is that the firm allegedly misled investors by not notifying them of the role of hedge-fund investor John Paulson—who was dubious of the housing boom—in selecting what went into the mortgage deal Goldman sold. Goldman said it fully disclosed the investments and didn’t need to reveal the Paulson connection.

According to a different New York Times article, Goldman’s mortgage group consisted of several hundred people split up into several subgroups, each with a specialty, which took different positions on the mortgage market. Fabrice Tourre’s mortgage group’s position clashed with many of the others by betting against the housing market, most of which took positive positions. “[Golman employee Jonathan] Egol and Fabrice were way ahead of their time,” said a former Goldman worker. “They saw the writing on the wall in this market as early as 2005.” Although an unpopular position within the company at the time, it turned out to be incredibly prescient. Unfortunately for Goldman, it just might turn out to have been a little illegal.

If you want insight into the whole CDO thing and don’t want to spend money on Michael Lewis’s The Big Short, you can read AK Barnett-Hart’s Harvard Thesis, which Lewis mentions in the acknowledgments section of his book here for free. It’s a lot drier and more academic than Lewis’s book, but it’s still insightful– and it’s well written and, most importantly, it’s free.

We’re not talking millions or even tens of millions or hundreds of millions. We’re talking billions. With a B. In fact, the highest earning 25 hedge funders earned a collective $25.3 billion, according to the survey, beating the old 2007 high by a wide margin. According to the New York Times,

The minimum individual payout on the list was $350 million in 2009, a sign of how richly compensated top hedge fund managers have remained despite public outrage over the pay packages at big banks and brokerage firms.

And when 20% of the population doesn’t have decent paying work, somehow that just seems a little… unseemly. I’m not saying these guys aren’t ridiculously smart and hard working and don’t deserve compensation. But the sheer greed… well. It’s a little much to take.

This year’s top earner (as ranked by AR: Absolute Return+Alpha magazine) was David Tepper, who raked in $4 billion in 2009 by betting big that the government wouldn’t let the big banks fail. His investors didn’t do too shabby either, gaining 130 percent last year. Tepper was quoted in the New York Times as saying, “We bet on the country’s revival. Those who keep their heads while others are panicking usually do well.”

George Soros came in second in terms of earnings with $3.3 billion in fees and investment gains. His fund grew 29 percent in 2009.

Still, the success of these few hedge fund managers is not representative of the entire industry. Big gains were not a constant last year. In fact, industry experts say there is a widening gap between winning and losing funds.

According to the New York Times,

For many of the top 25, the big personal gains in 2009 came after steep losses in 2008. Half of the top 10 managers in 2009 lost money the year before, including Mr. Tepper, whose flagship fund, Appaloosa Investment Fund I, dropped 27 percent in 2008….

Three managers among the top 10 — Mr. Soros (No. 2), James Simons (No. 3) and John Paulson (No. 4) — were back-to-back winners, having profited during the lean times of 2008 as well as in the booming market of 2009.

It remains to be seen if Washington (or any external influences, such as the E.U.’s proposed AIFM directive or this summer’s G20 summit) will seek to limit hedge fund pay days. According to a Washington Post article,

When the Obama administration imposed restrictions on executive pay last year at some of the largest companies the government had bailed out, officials said they were aiming to set a new standard for compensation across corporate America that would discourage risky business practices.

But as firms begin to disclose last year’s bonuses ahead of annual shareholder meetings, it is becoming clear that companies across a wide range of industries are paying executives in ways that officials worry will not discourage the kind of excessive short-term risk-taking that led to the financial crisis.

The Treasury Department said it is not looking to limit the total pay executives receive. Kenneth R. Feinberg, President Obama’s special master for compensation, wants to change pay incentives, giving executives a greater stake in the long-term performance of their firms. That would mean, for example, smaller up-front cash salaries and fewer perks, more compensation in the form of company stock and a longer wait to receive it.

My guess is that little will be done to limit compensation because the rich are powerful. My hope is that those who have more money than god feel a pang of conscience and give some of the money to charity (or just do it for the tax write off at the very least).