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If you looked on in envy as Ed Lampert made



investors rich and pulled


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from the abyss, you learned a valuable lesson.

The smart money is often smarter than you.

Lampert's success show that all the high-priced investing advice in the world is no substitute for an inside look at a publicly traded company. While inside information is hard to come by and illegal to trade on, following the footsteps of time-tested investors like Lampert, who buys big stakes and influences management, is legal, free and relatively easy.

Mirroring the moves of bigfoot investors is an old strategy, but it's a good one -- especially in an age in which hedge fund activity and activism are both exploding. The


estimates total hedge fund assets in the U.S. are now $1 trillion, up from $795 billion last year. That figure is projected to reach $5 trillion by 2008.

And, while the ship might already have sailed on Kmart and Sears, there are other well-regarded hedge fund managers whose recent activity could serve as a tell for future profits. Steel Partners, run by Warren Lichtenstein, is one.

Over the years, Lichtenstein has garnered a reputation as a hard-nosed corporate raider with a talent for finding value, in deals like his 1999 acquisition of United Industrial. Within four years of buying a stake in the company, Lichtenstein was its chairman, working with three handpicked executives. The stock price had doubled.

Steel Partners is currently involved in several takeover attempts. It recently bought up 9.3% of

BKF Capital Group

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, an asset management business that has lost money in recent years despite having $13 billion in hedge fund and traditional money management assets.

"We do not understand how a money-management company that manages approximately $13 billion of assets and has over $100 million in revenues can lose money," wrote Lichtenstein in a typically blunt letter to BKF's management. Steel plans to nominate three directors to the BKF board, lose its poison pill, and use its excess cash to increase dividends or repurchase stock. Last Thursday, he filed a letter with the SEC urging shareholders to vote at a meeting in May for BKF to hire an investment bank to pursue a sale of the company.

Previously, Steel Partners made a failed bid, along with

Pirate Capital

, for



, a mini-conglomerate that operates in the defense, automotive, fine chemicals and real estate sectors. In November, the activist investors expressed concern about the company's planned equity financing and offered $17 a share for the firm, which was trading at $14.

GenCorp has fended off the hedge funds, but appetites have been whet and the stock is above $20. Meanwhile, Steel Partners has retained its stake in the company. The fund also recently disclosed purchases in shares of



, a holding company based in Lake Mary, Fla., that operates several manufacturing entities, and

Rotech Healthcare


, a medical equipment supplier based in Orlando, Fla., that trades over the counter.

Aside from aggressive turnaround plays, investors can use regulatory filings from other fund managers with successful track records to locate potentially undervalued stocks. Marty Whitman's Third Avenue Management invested alongside Lampert in the early days of Kmart's run. It discloses a variety of holdings in its most recent

13F-HR filing from February., including well-known stocks such as


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Del Monte



Applied Materials

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Other savvy funds that can be followed with a subscription to the SEC's Edgar online service include Soros Fund Management, Cerberus Capital and Caxton Corp.

Another option is to invest in stocks of diversified holding companies that are run by time-tested investors. Warren Buffett's

Berkshire Hathaway


is the obvious example. Trading at $88,000 a share, Berkshire's 15-year average annual return is 18%. Less well-known is a smaller holding company,

Leucadia National


, that has bested that performance with a 15-year annual return of 22%.

Joseph Steinberg and Ian Cumming, who run Leucadia, have been buying long-distance phone assets. Last year, they disclosed a 5% in



, which has since agreed to be acquired by

Verizon Communications

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for $6.7 billion. Before that, they paid $778 million to buy

WilTel Communications

, part of the wreckage from the crash in optical communications companies in 2000.

Obviously, not every hedge fund turnaround play is going to spin gold. Buffett is notoriously good at wangling with companies for advantaged securities that retail investors are never going to touch.

Other deals are risky. Consider S.A.C. Capital's bet on

Wet Seal


, a mall-based teen-clothes chain reeling from sales and earnings declines that is currently on life support.

Wet Seal's chairman and chief executive resigned in November, just months after S.A.C.'s Steve Cohen revealed a stake in the company, signaling a turnaround. Cohen has installed a new management team that hired a third-party liquidator to oversee mass store closings and inventory liquidations. Some investors see potential value in its Arden B. concept, which boasts double-digit revenue gains.

Still, the investment is not S.A.C.'s first in Wet Seal, and many view the bid as an effort to limit losses in what has become a toxic stock. Wet Seal has traded as high as $3.77 this month and as low as $2.93, a volatility range that can appeal only to masochists.