At The Motley Fool, we understand that it often pays to zig when Wall Street zags, but that doesn't mean we should ignore what leading fund managers are buying and selling. Hedge funds often aren't in lockstep with the broader market and with their ability to attract the best stock-picking minds in the world, they can be a valuable source of insight.

Every quarter, fund managers who manage more than $100 million must disclose their quarter-end holdings publicly by filing SEC Form 13-F. The form lists all U.S.-traded securities held by the manager at the end of the quarter. While the form does not disclose the manager's short positions or intra-quarter trades, it can be a valuable insight into a manager's long bets. To help us make use of 13-F data, we turned to Motley Fool partner AlphaClone, a research and investment management firm that tracks hedge funds' public disclosures and develops investment strategies based on them.

Q4 2010 update
William Ackman is the founder and CEO of Pershing Square Capital Management, a value-oriented hedge fund with an activist investment approach. Ackman looks for companies that have fallen on hard times, acquires significant stakes, and seeks to unlock their value by actively lobbying management and the board. Some of his largest recent winning investments include General Growth Properties and McDonald's.

The total market value of Pershing's disclosed equity holdings for the quarter ended Dec. 31, 2010, was $5.7 billion across 12 holdings.

The fund's 10 largest positions (shares held) as of Dec. 31 and associated changes in number of shares held from the previous quarter were:

  1. J.C. Penney (NYSE: JCP) -- increased 122.2%
  2. General Growth Properties (NYSE: GGP) -- increased 192.1%
  3. Fortune Brands (NYSE: FO) -- increased 123.3%
  4. Citigroup (NYSE: C) -- no change
  5. Kraft Foods -- reduced 29.5%
  6. Target -- reduced 47.7%
  7. General Motors (NYSE: GM) -- new
  8. Corrections Corp. of America (NYSE: CXW) -- reduced 28.4%
  9. Howard Hughes Corp. -- new
  10. Automatic Data Processing (Nasdaq: ADP) -- reduced 83.8%

During the quarter, Pershing Square started new positions in GM and Howard Hughes (a spinoff of General Growth) and added to its position in J.C. Penney, General Growth, and Fortune Brands. The fund reduced positions in Kraft, Target, Corrections Corp. of America, and ADP. However, he didn't sell out his whole position in any of those stocks.

How would you do following Pershing Square?
According to AlphaClone's back-test simulation, those who invested in Pershing Square's 10 largest holdings at the time they were disclosed publicly each quarter would have returned 53.6% since 2006, versus 14.4% for the S&P 500 (including dividends) as of Feb. 21. Here's a chart showing AlphaClone's backtest model:

The backtesting strategy highlighted above buys/sells its holdings each quarter, five trading days after the SEC's filing window for Form 13-F closes.

Selected Q4 2010 commentary
The completed trades above show Pershing Square's recent focus on the Services sector. Currently disclosed holdings have a 54.7% allocation to the Services sector, with 17.6% in Conglomerates and 12.2% to Financials. Here's where the firm is winning and losing currently, and where it's making big new bets:

Current winners
Fortune Brands and J.C. Penney were among the top performers during the fourth quarter, with their shares rising 23% and 20% respectively. Fortune Brands, which accounts for 17.6% of Pershing Square's total holdings, is a leading consumer brands company that operates in three consumer categories: spirits, home & security, and golf. The company has trailing-12-month price-to-earnings ratio (P/E) of 19.

J.C. Penney, based in Plano, Texas, runs a chain of more than 1,100 midrange department stores in all 50 U.S. states and Puerto Rico. Ackman bought a 16.5% stake in the company last October, securing himself a position as a director. The company has a market capitalization of about $8 billion and generated revenue of $17.8 billion in 2010.

Current losers
Pershing Square's biggest recent disappointment is Borders Group. The bookstore chain has struggled a great deal in the face of fierce competition from online booksellers, and it was forced to file for Chapter 11 bankruptcy protection last month. Pershing Square held 5.2 million shares in Q3 2006, when the stock was trading in the mid-$20s. Since then, Pershing had increased its stake to 10.6 million shares.

New bets
GM is one of the three largest car manufacturers in the U.S. The company is engaged in the designing, manufacturing and retailing of vehicles globally including passenger cars, crossover vehicles, and light trucks, sport utility vehicles, vans and other vehicles. After filing for bankruptcy on June 2009, GM has emerged strong, with reported revenue of $135.3 billion in 2010 and positive net income attributable to common stockholders of $4.67 billion for the year. Pershing's total holding was 7,187,740 shares as of Dec. 31, 2010.

Dallas-based Howard Hughes is a major real estate development and management company that bears the name of its famous founder. Once owned by the Rouse Company, it became a separate company again in 2010 as a spinoff of General Growth Properties, which emerged from bankruptcy protection. It owns properties such as the South Street Seaport in Manhattan. Pershing's total holding was 3,568,017 shares as of Dec. 31, 2010.

So there you have it -- the blow-by-blow of Pershing Square Capital Management's latest moves, and why it can matter to your portfolio. Tell us what you think in the comments below.

Company data provided by AlphaClone LLC, a San Francisco-based research and investment management firm that tracks hedge funds' public disclosures. For more information on the firm's investment approach, click here to visit AlphaClone.

Backtesting is the process of evaluating a core strategy by applying it to historical data. Backtested performance results are provided for purposes of illustrating historical performance had a core strategy had been available during the relevant period. Backtested performance results are hypothetical and have inherent limitations. AlphaClone makes no representation that any core strategy will achieve performance similar to any backtested performance results. Actual results could differ materially from backtested performance and future results could differ materially from backtested performance. Past performance is no indication or guarantee of future results.

General Motors is a Motley Fool Inside Value selection. Corrections Corporation of America and Fortune Brands are Motley Fool Stock Advisor recommendations. Automatic Data Processing is a Motley Fool Income Investor selection. 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.