Falcone's is one of at least three big hedge funds that have stumbled since their career-making wins in the mortgage collapse. Paulson & Co., the $31 billion fund that earned $15 billion in 2007 betting against mortgages, was down 11 percent this year as of August.

Pellegrini Downsizes

Founder John Paulson's former top lieutenant, Paolo Pellegrini, set up his own firm, PSQR LLC, in 2009. After gaining 62 percent that year, he lost 11 percent in 2010 through August and then decided to return money to outside investors and just manage his own funds, according to a person briefed on the decision.

"Just because a manager got the subprime trade right, it doesn't necessarily mean he's a skilled manager," says Brad Balter, managing partner of Balter Capital Management LLC, a Boston-based firm that invests in hedge funds for clients. "There have been several funds that benefited from that bet in 2007 whose performance was mediocre before and continues to be mediocre today."

These days, Falcone is literally blasting his investors' money into space. Late in 2010 or early in 2011, LightSquared plans to launch its first communications satellite aboard a Russian-built rocket fired from Kazakhstan. A second bird will go up sometime after that, giving the company the ability to provide mobile Internet access anywhere in the U.S.

Investor Lockup

The risk for Falcone is alienating investors who thought they were putting money into a hedge fund that traded securities that were easy to buy and sell, not one that locks up their money in a private wireless company that could take years to build and years longer to turn a profit.

"He's changed the very focus of the fund," says Geoffrey Bobroff, president of Bobroff Consulting, an investment fund consultant in East Greenwich, Rhode Island. "If you do that, you need to afford people the opportunity to exit."

Like many hedge-fund managers, Falcone declined to give investors all of their money back in 2008 because he would have had to sell assets at bargain-basement prices, if he could sell them at all. Those clients are still waiting for more than 90 percent of the money he withheld, they say.

Taste For The Offbeat

Falcone has always had a taste for offbeat investments. His portfolio includes a 49 percent stake in African Medical Investments Plc, a London-based startup company that operates clinics for middle-class Africans and expatriates across the continent. Harbinger is also an investor in a casino in Vietnam.

The Falcones are hedge-fund celebrities in New York, covered in gossip pages and photographed at charity dinners, where Lisa turns up in diaphanous gowns and short skirts, usually with a different bejeweled cross around her neck for each event.