The other source of profit is their own clients. The avg Paulson client has lost money, I bet . . . I wonder if he has generated more in profits than losses. His losses with a much larger AUM might exceed his enormous gains on a smaller base.
Contrary to what most of the gamblers on here would like to think, the markets serve legitimate business functions. This is all covered in the basics of any business school program, the program that you guys love to hate because your credentials are so bad that you can't get in. In telling you this, I've just answered your question right there.
Let's divide the market into three slices, winners, losers, and market. The interesting thing is that the return of winners and losers combined is equal to market or the group of passive investors, and all three combined are of course the market. That means that all excess return is transferred from the losers to the winners, minus transaction fees. That's obvious of course, but we usually don't think about where the excess return comes from. Then all we have to do is reverse engineer the loser's patterns, do the opposite and $$$PROFIT$$$
perhaps the passive investors (equity funds) would earn more if without these big HF winners (active traders). probably a major source for their excess returns.
The passive investors are index investors, I suppose that's what you mean by equity funds. Like I said, the passive investors earn the market return, and the market return is the market return, regardless of HF performance. (I should make clear that winner/loser refers to returns above/below market, not to absolute returns).
the more i think, the more i don't understand. just too complex: http://en.wikipedia.org/wiki/Complex_systems http://en.wikipedia.org/wiki/Complex_system