Updated from May 7

Tom Wolfe calls them the new masters of the universe. The media goggle over their billion-dollar fees. For the top tier of hedge fund managers, the sky looks like the limit.

Yet, away from the headlines, one of the industry's legendary pioneers is quietly sinking toward crisis as half of his clients have lost money over the long haul.

How big is John W. Henry? He was a hedge fund king before anyone had heard of such a thing. He's been speculating on the Street with billions since the early 1980s -- when most of today's big shots were still in junior high, and an "alternative investment firm" was one that allowed chinos on Fridays.

For nearly 20 years, he left Wall Street trailing in his wake as he racked up huge profits for his clients and himself. Henry's managed futures firm used, and even pioneered, quantitative chart-based trading strategies to beat the market.

Henry became a legend. He made so much money he was able to buy the Florida Marlins. Then, most famously, he bought the Boston Red Sox and took them to a World Series victory.

Other hedge fund tycoons buy helicopters. John Henry used his money to end the Curse of the Bambino. How big can you get?

But that moment in the fall of 2004 when the Red Sox won it all proved to be the pinnacle of his success. Since then, his investment fortunes have been in an increasingly desperate slide.

How bad does it look? You can see the figures at Henry's own Web site, and they are astonishing. Since December 2004, his main investment fund has lost a stunning 36%. And according to a report in the May 29 Wall Street Journal Henry's slide continues, as Merrill Lynch has redeemed $600 million from the firm.

While a simple index fund over that period would have turned each $10,000 into about $12,450, Henry's "Strategic Allocation" fund has turned the same amount of money into a mere $6,360. Except we're not actually talking $10,000. We're talking hundreds of millions of dollars.

No wonder his company's assets under management are in free fall as clients yank out what money they have left. In three years, assets have more than halved from $2.9 billion to just $1.2 billion by the end of April. And the latest annual report reveals that half of Henry's clients have now actually lost money investing with him over the long term.

The company declined to comment.

The bottom line?

Henry had disastrous back-to-back years in 2005 and 2006 and his magic touch seems to have deserted him. He's been caught on the wrong side of trade after trade. Mark Rzepezynski, his long-standing chief investment officer, finally left in a shake-up over the winter. It hasn't helped yet. The main investment fund, Strategic Allocation, has already lost another 9.5% so far this year.

The firm's letters to the clients blame the market for not following trends, or for ignoring long-term economic fundamentals. This is an unlucky gambler blaming the cards, and the mass desertions show many clients have run out of patience.

Henry's astonishing fall from grace raises two thoughts.

First: Today's hedge fund kings justify their ridiculous incomes by arguing that if they don't perform, they don't get paid. But it's not quite true. These managers get 20% of the profits when times are good, but they don't then give that money back when times are tough.

A fascinating chart on Henry's Web site shows that, thanks to recent catastrophic losses, anyone who jumped into his main fund when it launched in 1996 and stuck with it until today has actually done worse than they would have in a fund that merely tracked the S&P, international stocks. Even 30-year government bonds fared better. Overall, they've done worse than a cheap index fund.

Henry collected huge fees from them early on. He has, of course, not returned that cash today. Indeed, while the clients' losses mounted last year he was out investing in a Nascar team.

The second thought is just how evanescent most hedge funds will be. Investors will find, so often, that there is no magic investment bullet. Today's superstars like to give their funds extravagant names, like "Raptor" or "Jolly Roger." I am not aware of any called Ozymandias, which seems a shame. Hail the fast money boys -- the kings of kings.
In keeping with TSC's editorial policy, Brett Arends doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Arends takes a critical look inside mutual funds and the personal finance industry in a twice-weekly column that ranges from investment advice for the general reader to the industry's latest scoop. Prior to joining TheStreet.com in 2006, he worked for more than two years at the Boston Herald, where he revived the paper's well-known 'On State Street' finance column and was part of a team that won two SABEW awards in 2005. He had previously written for the Daily Telegraph and Daily Mail newspapers in London, the magazine Private Eye, and for Global Agenda, the official magazine of the World Economic Summit in Davos, Switzerland. Arends has also written a book on sports 'futures' betting.