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Over the past decade, activist-run funds have returned nearly 267% - more than double that of the Standard & Poor's 500 index.
What many don't realize is that figuring out how to profit from the lucrative moves of these activist investors is easier than it looks.
And it's a way for retail investors to participate in a trend that continues to accelerate.
Activist Investors Rake in Record Profits
Last year, activist investors targeted 369 companies, a 12% increase over 2012. But activist investors are on pace to target about 440 companies this year - a 19% increase over 2013.
And even that could be a conservative estimate. The Wall Street Journal recently reported that many of the top activist investors have been stockpiling cash.
Daniel Loeb's Third Point LLC raised a jaw-dropping $2.5 billion in just two weeks in August, the Journal reported, with Nelson Peltz's Trian Fund Management LP, Ackman's Pershing Square Capital Management, and Barry Rosenstein's Jana Partners also loading up their war chests.
That means not only will we see more activist investor targets, but more high-profile targets.
Just within the past month, Carl Icahn won three board seats at Hertz Global Holdings Inc. (NYSE: HTZ), and Rosenstein snagged two board seats at Walgreen Co. (NYSE: WAG). Of course, Icahn also pushed Apple Inc. (Nasdaq: AAPL) last year to pay a bigger dividend and buy back stock.
Meanwhile, Peltz has turned up the heat in his campaign to drive E. I. Du Pont De Nemours and Co. (NYSE: DD) to break up.
Historically, retail investors have struggled to profit from these moves, because by the time they become public, the targeted stocks have already jumped higher.
But there are ways for retail investors to piggyback on the successes of the activist investors...
A Simple Way to Profit Like Big-Time Activist Investors
The best part about how to invest in stocks targeted by activist investors is that you don't actually have to invest in those individual stocks.
Instead, there are several funds that closely track the activity of the major activist investors. They do all the heavy lifting; all you need to do is buy the fund and enjoy your gains.
The primary option is the 13D Activist Fund (MUTF: DDDIX, DDDAX). The biggest difference between the two flavors of the 13D Activist Fund is the price of entry: the DDDAX has a minimum initial investment of $2,500, while for the DDDIX it's $1,000,000.
The DDDIX version also delivers better performance; it was named a "Category King" by The Wall Street Journal last month. It ranked No. 2 out of 585 funds in the multi-cap growth equity category for the year ending July 31, in which it generated a return of 20.1%.
The philosophy here, says 13D fund manager Ken Squire, is to invest in as many activist situations as possible.
"Obviously, the activist is an important factor, but particularly with activism, the benefit comes from investing in a portfolio environment," Squire told Barron's. "You never know when a catalyst is going to hit, or which catalyst it is going to be. Some of them may never hit and some may hit in three years, so investing in just one is difficult. But, if you have a portfolio of 40 situations, catalysts are hitting more frequently. It is the best way to go."
A second, more nuanced choice went live in August: The Direxion iBillionaire Index ETF (NYSE Arca: IBLN). This fund doesn't track activist investors exclusively, but instead focuses on the hedge fund holdings of between five and 10 top billionaires.
Follow me on Twitter @DavidGZeiler.
UP NEXT: When it comes to billionaires, it pays to watch what they do. And Jim Rickards, who spent 35 years on Wall Street and worked for the CIA, believes that investors should be studying Warren Buffett's recent acquisitions as part of a four-part strategy to protect themselves from what he expects will be a 25-year depression. In a must-see interview, he explains why the economy is headed for trouble and what investors can do about it. You can't afford to miss this video.
- Barron's: 13D Fund: Invest Like Carl Icahn and Other Corporate Raiders
- The Wall Street Journal: Activist Investors Build Up Their War Chests
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.