Hedge Fund Report: Activists Don't Always Shout

Those talks demonstrate the growing role of hedge funds in the financial markets. In 1969, hedge funds represented 200 shops managing $1.5 billion, according to HedgeFund Intelligence. There are now nearly 9,000 hedge funds with a global asset size of $1.5 trillion. Such growth, plus hedge funds increasingly catering to retail investors, is what led the SEC to impose its recent hedge fund registration rule. But apparently, that's as far as we get.

The Sincerest Form of Flattery

It pays to imitate hedge funds. In a research report released last week, Morgan Stanley(MS Quote) describes one of its investment models based on the concept of investing in stocks that are highly popular among hedge funds. This strategy of buying "high-conviction hedge fund ideas" would have realized a 486% cumulative return since 1999 vs. the S&P 500 return of 12% or the Russell 2000 return of 89% during that same period, the report says.

Analyst Henry McVey, co-author of the research, writes that using the SEC 13-F filings, his group first ranked the 25 stocks within the S&P 500 with the highest percentage of hedge fund ownership.

The second step of the methodology consisted of screening those stocks to determine those with the smallest number of hedge fund owners. The idea is to narrow down the stocks to 10 names that have a few number of hedge fund investors with high percentage ownership.

Investing with hedge funds is one thing. But the model stresses the importance of investing in stocks that are not too crowded with too many hedge funds. In other words: One hedge fund with a strong conviction is better than several piggy-backers.

For those who want to invest in hedge fund-like vehicles but with the ease and relative safety of mutual funds, a solution exists.

A new generation of open-end mutual funds called hedgelike mutual funds combine alternative investment strategies, such as leverage and short-selling, with the low minimum investments and accessibility of a mutual fund. While a hedge fund typically requires a minimum investment of $1 million and is open only to qualified investors, those hedgelike mutual funds are available to all with as little as $1,000 or $2,500. Due to their growing popularity, Morningstar created a long/short category of mutual funds, as previously reported here.