Hedge-fund manager John Paulson personally netted more than $5 billion in profits in 2010—likely the largest one-year haul in investing history, trumping the nearly $4 billion he made with his “short” bets against subprime mortgages in 2007.

Mr. Paulson’s take, described by investors and people close to investment firm Paulson & Co., shows how profits continue to pile up for elite hedge-fund managers. Appaloosa Management founder David Tepper and Bridgewater Associates chief Ray Dalio each personally made between $2 billion and $3 billion last year, according to investors and people familiar with the situation. James Simons, founder of Renaissance Technologies LLC, also produced profits in that range, say investors in his firm.

By comparison, Goldman Sachs Group Inc., Wall Street’s most profitable investment bank, paid all of its 36,000 employees a total of $8.35 billion last year. James Gorman, chief executive of 76-year-old investment bank Morgan Stanley, is expected to receive compensation of less than $15 million for 2010.

Mr. Paulson and his fellow managers seldom take much of their profits in cash. Some of the profits are so-called paper gains, which reflect the rising value of their firms’ holdings, and could erode if those investments sour. Other gains come from selling investments, and most of those are rolled back into their funds.

Mr. Paulson and the other top managers made winning bets on commodities, emerging-market companies, bank shares and U.S. Treasury bonds, among other investments. These moves, along with profitable picks by other funds, are part of the reason the hedge-fund industry is back on its feet after a rough stretch. Assets managed by hedge funds have grown to a near-record $1.92 trillion, up 20% over the past year. Assets jumped almost $150 billion in the fourth quarter alone, the largest quarterly growth on record, according to Hedge Fund Research, Inc.

Still, the average fund gained just 10.49% last year, according to the research firm. That’s well below the 15% gain of the Standard & Poor’s 500 stock index, including dividends, and the 19% return of the average stock mutual fund, raising questions about whether the industry can profitably invest the influx of new cash.

Indeed, the enormous gains by Mr. Paulson and the other managers resulted from solid, though not spectacular, performance. Their personal gains came in part from the sheer scale of assets under their control. The largest hedge fund in Mr. Paulson’s $36 billion investment portfolio, Advantage Plus, grew 17% last year, while another big one rose 11%, falling below returns for the broader stock market.

Part of Mr. Paulson’s more that $5 billion profit came from his firm’s 20% cut of his funds’ profits, known in the industry as the “performance fee.” Those fees amounted to roughly $1 billion last year, according to a person familiar with the matter. An added plus for Mr. Paulson: A chunk of those profits are treated as long-term capital gains and taxed at a far lower rate than the standard income-tax rate.

More than $4 billion came from gains on Mr. Paulson’s investments in his funds.

Mr. Paulson amped up profits for himself and many of his investors in a novel way. He was worried about long-term weakness of the dollar and other major currencies, so he devised a way to embed a bet on gold into each of his funds—for those investors who opted for that approach. Mr. Paulson has placed the bulk of his own wealth in these gold-denominated funds and a separate gold-focused fund. Because gold rose sharply in value last year, the gold-denominated versions of his funds rose as much as 45%.

The performance last year, nevertheless, paled in comparison to his 2007 returns, when Mr. Paulson made a huge wager against subprime mortgages and his funds scored gains of as much as 590%.

Last year “wasn’t the greatest trade of all time, but to manage more than $30 billion and still have gains topping 30% is very rare in the hedge-fund business,” says Jeffrey Tarrant, who helps run Protégé Partners, a New York firm that invested in Paulson & Co. in the past.

One way to view the size of Mr. Paulson’s $5 billion profit: It is nearly as much as the $6.4 billion that Forbes magazine last year estimated as the total net worth of Steven Cohen, the well-known head of $12 billion hedge-fund firm SAC Capital. (Mr. Cohen likely added about $1 billion in 2010, one investor says, after 16% gains in his flagship fund).

Appaloosa’s chief, Mr. Tepper, who specializes in distressed-debt investing and manages around $16 billion, notched gains of about 30% by turning optimistic about U.S. stocks before many rivals. Mr. Tepper correctly anticipated the Federal Reserve’s recent efforts to boost the economy, steps that have helped the market rally.

Mr. Dalio’s Bridgewater Associates, which manages $86 billion in hedge funds and other vehicles, made an early shift to U.S. Treasurys, commodities and emerging-market currencies. He correctly anticipated that the Fed would flood the financial system with cash to help the economy, something that would boost bond and gold prices. Bridgewater also anticipated growth in China and emerging markets, which it figured would help commodities and currencies of those nations. Its hedge funds gained more than 30% last year.

Mr. Simons no longer runs day-to-day trading at Renaissance Technologies, which manages nearly $16 billion and specializes in lightning-quick computer-based trades, so his pay actually dropped a bit in 2010.

But Mr. Simons still owns the bulk of the firm and invests in its hedge funds. Renaissance’s two funds available to outside investors, Renaissance Institutional Equities and Institutional Futures funds, gained about 18% last year, following a disappointing 2009 when the firm considered closing them to outsiders.

Renaissance’s Medallion fund, which is primarily open to Renaissance employees like Mr. Simons and has long recorded big gains, climbed about 30%, according to people close to the matter.

The hedge-fund business now is so big that some managers are hinting they’ll return money to clients instead of investing it. Handling so much cash can make it hard to generate big gains in some trading strategies.

Mr. Tepper, for example, has told some investors to expect to receive some cash back in 2011. He returned $500 million to investors last year. This year, he may return several billion dollars, according to people close to the matter.

Other firms, such as Paulson & Co., have closed certain funds to new investors, but are actively raising new money for other funds. Mr. Paulson recently hosted a New York City event that featured speeches by former Fed chief Alan Greenspan and several chief executives of gold companies, aimed at boosting interest in his gold-focused fund.

Despite Mr. Paulson’s winning touch in 2010, he may face a challenge. Gold is down more than 6% so far in 2011, meaning he is likely starting out with losses.

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com

It took John Paulson months to convince investors that housing would crumble.

Now it’s taking him awhile to get them excited about gold, his latest passion.

When Mr. Paulson’s Paulson & Co. late last year announced it was starting a hedge fund to make a big gold bet, many on Wall Street expected investors to line up. Paulson & Co. scored about $20 billion in profits in 2007 and 2008 wagering against subprime mortgages and financial companies. It then bought financial shares last year to add more gains.

Some gold traders expected Mr. Paulson’s new fund, launched Jan. 1, to raise billions of dollars and even help push gold higher when it started buying this year.

That hasn’t happened. Despite months of investor meetings, Mr. Paulson has raised $90 million or so for his new gold fund, according to people close to the matter. Even the $250 million that Mr. Paulson himself placed in the fund hasn’t persuaded many investors to get on board.

The fund, despite gains this month that bucked a selloff for gold, has lost about 10% since it was launched, investors say. That’s making it that much harder for Mr. Paulson to convince clients.

“I am a long-term believer in inflation, but I feel the weakness in the economy in the short run will trump the longer-term story” for gold, says Christopher Zook, who at CAZ Investments LP invests about $150 million in hedge funds.

Mr. Zook considered but decided not to invest in the gold fund for now. “It’s purely my negative view on gold in the short run,” he said. “I just am waiting for hopefully a better entry point.”

The disappointing response may be a sign that investors are becoming more cautious about the yellow metal, which has declined about 1.7% this year, though it has risen this week.

Shares of AngloGold Ashanti Ltd., one of Paulson & Co.’s biggest gold-mining bets, have fallen to about $37 from nearly $47 in early December.

Mr. Paulson has told his investors he expects his new fund to outperform gold prices as they rise. That suggests it also could do worse than the market if the dollar continues to rally, pushing gold down further.

Some gold traders expected John Paulson’s new fund to raise billions of dollars and even help push gold higher when it started buying this year. That hasn’t happened. Despite months of investor meetings, Mr. Paulson has raised $90 million or so for his new gold fund, according to people close to the matter

Some investors have noted that exchange-traded funds that use leverage, or borrowed money, to bet on gold might be able to match Mr. Paulson’s fund. By contrast, it was almost impossible for many investors to replicate the complicated derivative moves that Paulson & Co. undertook with its credit funds in 2007 to bet against subprime mortgages.

Also, some Paulson & Co. investors may have had their fill of gold. The firm already has about 10% of its holdings in gold-related investments apart from the new fund.

It’s too early to count Mr. Paulson out.

Paulson & Co. raised just $147 million for its first credit fund in the spring of 2006, a time when housing was raging. Money soon was rolling into the fund, however, and his gains turned enormous in 2007.

Some investors are asking why they should pay Mr. Paulson to invest in gold, as he doesn’t have years of commodity experience. But some said the same thing about his housing investments before they turned into winners.

Mr. Paulson has told investors that his gold strategy is a long-term one that will reap rewards over the next few years as the value of leading currencies drop. Recent weakness in gold prices could enable Mr. Paulson to buy up gold miners and derivatives at lower prices. That would make it easier for him to rack up gains later on.

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com

Mr. Paulson has told his investors he expects his new fund to outperform gold prices as they rise. That suggests it also could do worse than the market if the dollar continues to rally, pushing gold down further.

Some gold traders expected John Paulson’s new fund to raise billions of dollars and even help push gold higher when it started buying this year. That hasn’t happened. Despite months of investor meetings, Mr. Paulson has raised $90 million or so for his new gold fund, according to people close to the matter

Some investors have noted that exchange-traded funds that use leverage, or borrowed money, to bet on gold might be able to match Mr. Paulson’s fund. By contrast, it was almost impossible for many investors to replicate the complicated derivative moves that Paulson & Co. undertook with its credit funds in 2007 to bet against subprime mortgages.

Also, some Paulson & Co. investors may have had their fill of gold. The firm already has about 10% of its holdings in gold-related investments apart from the new fund.

It’s too early to count Mr. Paulson out.

Paulson & Co. raised just $147 million for its first credit fund in the spring of 2006, a time when housing was raging. Money soon was rolling into the fund, however, and his gains turned enormous in 2007.

Some investors are asking why they should pay Mr. Paulson to invest in gold, as he doesn’t have years of commodity experience. But some said the same thing about his housing investments before they turned into winners.

Mr. Paulson has told investors that his gold strategy is a long-term one that will reap rewards over the next few years as the value of leading currencies drop. Recent weakness in gold prices could enable Mr. Paulson to buy up gold miners and derivatives at lower prices. That would make it easier for him to rack up gains later on.

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com