Then, Falcone lost his touch. His funds, which had loaded up on shares of iron-mining companies and power producers, plunged as the economy slowed. The Capital Partners fund fell 50 percent from its peak in mid-2008 to the end of that year. It rose again in 2009, placing 13th in Bloomberg Markets' annual hedge-fund ranking, with a 42 percent return. That, however, only made up for 2008 losses.

Down to $9 Billion

Spooked investors asked for their money back. These days, Falcone manages just $9 billion, a third of his boom-time pile.

Many hedge funds have had a lackluster 2010. The private pools of cash -- raised from wealthy families, pensions and endowments -- returned 1.45 percent on average in the first eight months of 2010, according to Hedge Fund Research Inc. in Chicago.

Mom-and-pop investors in the Pimco Total Return Fund, the world's biggest bond fund, earned 8.7 percent in the same period, including reinvested dividends.

Managers who are still in the game -- 2,900 hedge funds closed from the beginning of 2008 to June 30 -- are paring risk. Many are shunning investments in private companies, which have proved hard to sell since the credit markets went into convulsions two years ago.

Taking on Verizon

Falcone is trying to recover with his biggest bet ever. He's building a wireless network powered by satellites and cell towers that will cover the entire U.S. and compete with AT&T Inc., Verizon Communications Inc. and billionaire Craig McCaw's Clearwire Corp. to deliver fast Internet service to smartphones.

Falcone says Harbinger has spent $2.9 billion on its broadband company, LightSquared, which in turn plans to pay Nokia Siemens Networks $7 billion to build and operate its network over the next eight years.

"I've always been a believer in wireless," Falcone says in a rare interview at his office 30 stories above Park Avenue in New York. He also acknowledges that his clients see LightSquared as a giant gamble because it accounts for much of Harbinger's portfolio. "This has been a hot button for some of my investors, the biggest issue for me in the last 12 months," Falcone said in mid-September.