How do Investment Bankers, Hedge Funds, Private Equity Firms, give such high returns?

Let's just address the category of hedge funds. There are two factors in a hedge fund manager's abiltiy to put up market beating returns. 1) superior investment selection. By this I just mean they make good bets. Many hedge fund managers make big "macro" bets -- meaning they take a position that some large move will occur (could be a country's currency, or an interest rate move, or a particular industry is being viewed incorrectly.) If they're right they win big, if not they lose. 2) The second factor that leads to big gains is leverage -- meaning they use borrowed money in addition to their investor's stakes to magnify the gains. This also magnifies the losses. If a bad bet is made with leveraged capital they close their doors. It happens too.