New York–based King Street Capital Management was one of a handful of hedge funds that performed strongly throughout the financial crisis, only to lag in the recovery. In 2008 the firm's domestic King Street Capital Fund and offshore King Street Capital Ltd. gained 3.6 percent, while many other hedge funds lost money. At the time, the firm was running a big short portfolio and had bet on credit default swaps of firms its portfolio managers predicted were likely to become distressed. The following year, the firm produced 20 percent returns, thrusting co-founders O. Francis Biondi and Brian Higgins onto Alpha's Rich List for the first time, raking in earnings of $375 million in 2009. They returned again this year for the second time, with $290 million in earnings, thanks to lucrative investments in distressed securities in 2012. But the firm's strong performance comes with a catch…