Many hedge funds do invest in IPOs. They also invest in all sorts of debt: corporate, municipal, sovereign, emerging market.

It's true that hedge funds and mutual funds also invest in the stock market, which is a secondary market where the money doesn't go to the original issuers. However the existence of a healthy and liquid secondary market is what gives primary investors the confidence to buy stakes (or lend) to start-ups in the first instance. Who would want these assets if they literally had no choice but to hold onto them forever (or until maturity or acquisition or bankruptcy).

Not saying it's a bad thing, only that it's a thing, and the availability of these types of funds to the rich and lack of availability to the average investor is one of the reasons for inequality, as the original poster was saying.

Becoming 'increasingly divorced' from economic reality doesn't mean that it's completely separate, only that even in times of low growth, the ultra rich have high yield funds available to them which exacerbates economic inequality. It's just a trend. Or as Piketty states, r > g. Hedge funds used to be entirely defensive against market downturns, today they're increasingly run by speculative traders, many of whom offer outsized returns.