Most hedge funds are underperforming the markets this year. In fact, since 2004, most hedge funds have actually underperformed the boarder markets, despite the huge bull market in stocks.

Since most hedge funds get paid based on their returns for the year, managers who do not want to underperform are now turning to shareholder activism as a way to increase shareholder value and ultimately boost their returns.

Want to piggyback off the top hedge funds?

Here are our picks for the top three plays on activist situations.

Leon Cooperman of Omega Advisors is opposing Castlepoint Holdings' (CPHL) $490 million acquisition by Tower Group (TWGP). Cooperman wants the company to share its analysis showing how this transaction is fair to Castlepoint shareholders. "Just show me I am wrong, and I will go along with the transaction quietly," Cooperman says, suggesting that the Tower Group needs to sweeten the package with a warrant that adds some $2 a share in value.

Castlepoint provides property and casualty insurance within the U.S. The balance sheet here actually looks decent, with Castlepoint boosting 35% quarterly earnings growth and profit margins north of 10%. Castlepoint also has $100 million in cash.

Omega Advisors owns 2,750,500 shares of Castlepoint.

Jasmie Holdco is evaluating a possible buyout transaction with Aladdin Knowledge Systems (ALDN). Jasmine's representative met briefly with Aladdin's management recently to inquire about a sale of the company's software digital-management rights business and was told that the company had no interest in a sale. Aladdin is evaluating whether to encourage the company to maximize shareholder value through a possible merger, sale of assets or business combination, which may include a transaction with SafeNet, a Jasmine affiliate.

Aladdin Knowledge Systems provides security solutions that reduce software theft, authenticate network users, and protect against spam and viruses. Aladdin has $100 million in cash, zero debt and an EV/EBITDA of 4.5.

Next is National Coal (NCOC). Venture Capital firm Small Ventures raised its stake to about 2.85 million shares of National Coal from about 2.41 million filed on August 7. . Small Ventures plans to discuss the possibility of a buyout of National Coal. The firm believes that National Coal was undervalued, due to an increase in the market value of coal and related futures contracts.

And it's always to good to pay attention to Carl Icahn. He recently raised his stake in Biogen (BIIB) to a whopping 17.5 million shares from the previously filed 12.4 million shares reported on March 31. Icahn increased his position after Biogen and Elan (ELN) reported two new cases of a brain disease in patients treated with their multiple sclerosis drug Tysabri.

For more activist ideas, including Motorola (MOT), Hansen (HANS), NRG Energy (NRG) and Bank of America (BAC), please check out the Latest Activist Situations portfolio, which we update regularly.

Also, here are the latest activist filings from Barron's.

Posted on Aug. 20, 2008