Updated with closing stock price.



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(AIG) - Get Report

massive run higher this week left much of Wall Street wondering what prompted it and where it will end.

AIG closed at $50.23 on Friday -- a 53% gain over last Friday's closing price of $32.85.

Shares of the New York-based insurer had alternated between positive and negative territory late Friday, but ultimately recovered. The stock continued rising in after-hours trading. It had earlier climbed as high as $55.90 and fallen as low as $45.55, in yet another day of heavy volume from small speculative bets.

On Thursday, volume hit more than 150 million, more than the 134 million shares outstanding, and six times more than the three-month average. But those shares being traded are held by a select few, including hedge funds that piled into financial names during the second quarter, switching from short positions held through the height of the financial crisis.

Taxpayers own about 80% of AIG, the troubled insurance giant, and their "fund manager" -- the Treasury Department -- is not in the trading game yet. The Treasury did not immediately respond to a request for comment, though it has indicated in the past that the government will not exit its positions in financial firms until they are more assuredly on safe ground. AIG, despite its stock surge, is most certainly not.

Even from an investment perspective, taxpayers selling AIG shares now would make little sense. The market value of public AIG holdings is $7.25 billion, just a tiny fraction of the $180 billion credit line the federal government has extended. In exchange, the Treasury received warrants to purchase millions of common shares.

Insiders own 10.5% of AIG's outstanding shares, including 14 million held by former CEO Maurice "Hank" Greenberg, through his company, Starr International. Given Greenberg's nearly 50-year history with AIG; his push to maintain influence after his ouster in 2005; and reports that new CEO Robert Benmosche has reached out to him for advice in steering the firm back to a competitive position, it is unlikely that he is selling his position. While new investors have seen AIG climb more than 45% this week alone, the value of his holdings has declined nearly 90% over the past year.

At Aug. 15, about 24 million shares were sold short, and since then, the stock has nearly doubled. The climb has been hastened by a short-squeeze already taking place earlier this month, as the portion of shares sold short fell from 2.2% at the end of July to 0.5% in mid-August.

While Benmosche has made some

bullish comments, and AIG's operations have improved enough to eke out a second-quarter profit, the fundamentals haven't changed enough to warrant the surge.

Instead, a

daytrader frenzy, fueled by short-squeezes and speculative hedge fund bets, has sent the stocks of largely government-owned entities skyward. Momentum traders have been pushing AIG shares higher with small bets averaging 219 shares per trade, according to


, rather than institutional investors who tend to make longer-term bets based on fundamentals.

"That's a big part of it -- you cant rely solely on the fundamentals to forecast the view," says Ralph Nacey, managing principal for WestSpring Advisors. "There's a new variable thrown in where you have a nontypical investor, being the government. The actions of the government are something that is difficult to predict,

compared to the typical study of the underlying fundamentals. So how do you treat it other than a technical study?"

AIG is not alone in this run-up, with

Fannie Mae


Freddie Mac



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Bank of America

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joining the frenzy, albeit Citi and BofA to lesser degrees.

A Goldman Sachs report on hedge funds released on Monday notes that the sector switched from a net-short position in financials that it had held for five quarters to net long exposure in the second quarter. The reversal was due to short-covering, as well as a huge amount of new issuance by major banks, including Citigroup, BofA,

JPMorgan Chase

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Wells Fargo

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Morgan Stanley

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Goldman Sachs

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itself, as well as plenty of smaller banks.

Hedge funds now control 3.7% of the equity markets, up from 2.9% at the end of 2008, despite the fact that the industry has consolidated 7% through fund closures. Hedge funds have a tendency to drive the market; piling into commodities last summer as oil prices reached new heights and shorting financials through the financial crisis, as major banks failed and others teetered on collapse. The Goldman report suggested that investors buy financial stocks.

"Using the 13-F filings to identify the 'stocks that matter most' to hedge funds has proven profitable in the past," notes the report. "Hedge fund selling pressures have abated, and hedge funds are likely to put more cash into their favorite positions."

Despite hedge funds' newfound interest in financials, they do not hold the biggest positions in AIG. Starr International is the top holder, followed by


(BCS) - Get Report

, with 5.5 million shares;

State Street

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, with 4.8 million; and other financial firms and institutional investors like Vanguard, Alico and Prudential. While much of AIG's recent moves have been anecdotally attributed to speculators like hedge funds, institutional investors often trade in small blocks to mask their moves, and it's possible some big names were making trades as well.

"There's a bunch of folks out there bidding up financial institutions in recent days," says Dan Alpert, managing partner for Westwood Capital. "I guess they ran out of reasonable institutions to bid up so they moved on to Fannie, Freddie, AIG. It makes no sense. It's all a sideshow."

Alpert notes that the mammoth amount of cash on the sidelines looking for richer rewards has given investors a new-found appetite for risk. An ongoing commentary about "green shoots" in the economy, backed by

Federal Reserve

Chairman Ben Bernanke last week, has only helped the rally, but Alpert says "it's due for a correction soon."

That correction began to take shape on Friday, but it's unclear where the volatile stocks are headed in the days and weeks to come. Ultimately, many analysts believe that common shareholders of AIG, Fannie and Freddie will be wiped out once the firms are fully restructured and pay back what they can to the government for the massive lifelines they've received.

-- Written by Lauren Tara LaCapra in New York