Research on Pay

My former Corporation Finance professor, Josh Rauh, along with Steven Kaplan, recently published some very interesting research on pay.  The link to the full study is here.

The most astounding sentence in the entire paper:

In 2007, it is likely that the top five hedge fund managers earned more than all five hundred S&P 500 CEOs combined.

The take on this trend taught by more than one of my professors at Booth is that due to technological changes and an increasingly interconnected world, these top hedge fund managers are able to scale up and apply their skills across a larger asset base.  This theory certainly makes sense to me, but the question remains:  Is it fair that these folks pay the capital gains tax rate on a large percentage of earnings and take 2 and 20 as their funds are appreciating but refuse to refund any principal if their funds blow up??