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 often turn to shareholder activism as a way to increase shareholder value and ultimately boost their returns.

Want to piggyback off the top hedge funds? Just check out a few of these ideas.

William Ackman of Pershing Square Capital Management said that he plans to vote against Longs Drugs' (LDG) $71.50-per-share acquisition by CVS (CVS). Pershing Square Capital Management owns 3.1 million shares in Longs Drugs and holds an economic interest via total return swaps for another 9.2 million shares (taking its total position to 25.6% of Longs). Pershing said that it has identified four potential buyers willing to pay more than $71.50 per share.

Ackman has publicly stated that he believes Longs Drugs' real-estate value is worth around $2.8 billion to $2.9 billion alone and has said a deal could happen in the $90-to-$95 range.

International Rectifier (IRF) said that it is urging shareholders to take no action with respect to a $23-per-share takeover proposal by Vishay (VSH). Vishay has announced that it will be nominating three individuals to International Rectifier’s board at the next annual meeting. International Rectifier is a manufacturer and producer of power management semiconductors. It has $400 million in cash and no debt, and it trades with a forward P/E of 34.

Everyone’s favorite activist investor Carl Icahn has raised his ownership in Amylin Pharmaceuticals (AMLN). Icahn, who now owns almost 8% of Amylin, has been in discussions with Amylin management and intends to seek to have further conversations with management and members of the board to discuss various possibilities to enhance shareholder value. Additionally, hedge fund Eastbourne Capital owns 12.5% of Amylin and has had discussions with management to increase its position above 15%.

At $3 off its 52-week low, Amylin has been hurt over concerns surrounding its key diabetes drug Byetta, which makes up more than 75% of the Amylin’s annual revenue. Amylin and its partner Eli Lilly (LLY) have announced a series of deaths related to pancreatitis. Amylin has a 25% short position.

The Children’s Investment Fund has accumulated more than 14 million shares in TransAlta (TAC), an electrical production and sales producer in Canada.

Recently, Luminus Management has offered to purchase TransAlta for CDN $39 per share. TransAlta’s board issued a press release stating the offer was too low. TransAlta trades with a forward P/E of 17.51 and EV/EBITDA of 8.672.

In tough times like these, it is always best to piggyback some of the best activist investors ever.

For more activist ideas, including Century Aluminum (CENX), Biogen Idec (BIIB) and NRG Energy (NRG), please check out the Latest Activist Situations portfolio, which we update regularly with the latest situations.

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

Posted on Sept. 17, 2008