Cash In on The New Hedge Fund Favorite


It's not everyday that Apple gets dethroned, much less by an insurance company. The hedge fund darling is finding itself in an unfamiliar spot as AIG has usurped its position as the top stock among money managers. As the insurance giant continues its recovery from the financial crisis, investors have by and large shunned the company because of its history, but this may be a turning point for AIG.

Making moves
With over 117 hedge funds holding AIG shares, of which 80 have AIG in their top 10 holdings (versus only 67 for Apple), the insurance company topped Goldman Sachs' hedge fund VIP list based on fourth-quarter buying and selling information released last week. This news refutes the idea that money managers are moving away from the insurer, after headlines warned of 35%+ reductions of AIG shares in both billionaire George Soros' holdings and the Och-Ziff Capital Management fund. Och-Ziff reduced its holdings in AIG by a substantial 50% in the fourth quarter.

AIG was previously Soros' No. 1 holding, but the investment guru reduced his shares by 37% in the fourth quarter. His portfolio now sports Citigroup as its top holding, after Soros increased his shares in the financial company by 435%. Both AIG and Citigroup continue to trade below book value, providing investors with a discounted share price.

Old news
This flocking of hedge funds to AIG is a tale of follow the leader. Fairholme Fund manager Bruce Berkowitz has been touting the potential for investors to win big by buying up AIG shares. It seems that other money managers have learned a few lessons from Berkowitz on the upside of AIG ownership. In a recent interview with Bloomberg, Berkowitz said that he expects his top holdings in AIG (No. 1) and Bank of America (No.2) to quadruple in the next five to seven years. Until recently, most would have hesitated to follow in Berkowitz's footsteps, but with the operational improvements seen at AIG, it's certain that a new trend has started.

Main Street
Everyday investors will have to catch up to the money managers if they want to cash in on the opportunity AIG presents. But it's not too late yet. The company is attractively priced, improving its underwriting practices, and has shed the last of its government ownership -- all positive factors that investors should pay attention to. As AIG becomes more popular and continues to improve its business, investors will have a harder time acquiring shares with so much potential upside -- as the stock price increases and approaches book value, its current discount will narrow.

The insurer is set to release its fourth-quarter results this evening after the closing bell, with a corresponding conference call tomorrow morning. If analyst predictions are correct, AIG will be reporting a slower quarter than its previous four, with a reduction in revenue and earnings. This might cause the share price to recede, allowing average investors to jump in. Just remember the old Buffett adage: "Be fearful when others are greedy, and greedy when others are fearful." If others believe AIG will continue in a downward trend, which analysts do not expect, that may give you a great opening.

Moving forward
If this shift toward AIG by money managers really is a turning point for the insurer, Main Street may not be far behind. But after bringing the financial world to its knees, most investors are still wary about owning a stake in AIG today. In a premium report from our top financial sector analysts, we'll fill you in on both reasons to buy and reasons to sell AIG, and what areas AIG investors need to watch going forward. Just click here now for instant access.

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Fool contributor Jessica Alling has no position in any stocks mentioned, but you can contact her here. The Motley Fool recommends American International Group, Apple, and Goldman Sachs. The Motley Fool owns shares of American International Group, Apple, Bank of America, and Citigroup and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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