Among the elite managers of the investing world, stocks are out of fashion. But even with hedge funds increasingly turning to alternative investments like mortgage-backed securities and commodities to reap the biggest profits, you can still find veteran stock pickers who are finding smart investments even after the big rebound in the market over the past two years.

Making an alternative killing
Overall, the trends that have helped the top hedge funds make the most money are the same ones that regular investors have jumped all over lately:

  • Just as ordinary investors have ridden Annaly Capital (NYSE: NLY) and Chimera Investment (NYSE: CIM) to huge gains from both big moves up in share price as well as sustained double-digit dividend payouts, many of the top hedge funds in a recent Barron's survey of 2010 performance in the industry use the same mortgage-backed securities that Annaly and Chimera invest in to make huge profits.
  • Commodities plays also dominated the hedge fund scene, just as precious metals funds ProShares Ultra Silver (NYSE: AGQ) and Central Fund of Canada (AMEX: CEF) gave investors huge gains in 2010.

But as the survey shows, you can still find some smart stock-picking funds among the upper echelons of the hedge fund world. One of those funds is Pershing Capital Management, which is run by activist investor Bill Ackman.

Ups and downs
Ackman certainly hasn't had a perfect record over the years. Perhaps his most infamous call was with Target, which resisted his calls for changes in the way the retail chain manages its real estate. He also made a disastrous bet on Borders Group, which filed for bankruptcy in recent months.

But that didn't stop the Pershing Square LP fund from earning more than 16% per year from 2008 to 2010, a period that obviously includes the huge market meltdown. Much of the return from the fund came from Ackman's investment in General Growth Properties (NYSE: GGP), a real estate investment trust that declared bankruptcy during the financial crisis.

General Growth has an interesting lesson for investors. Rather than giving up on the investment, Ackman saw the bankruptcy filing as an opportunity. He jumped into General Growth's management, joining its board and getting the company much-needed financing. Eventually, he joined Fairholme Fund manager Bruce Berkowitz in providing $6.5 billion in equity, which resulted not only in a gain of more than 3,000% but also a chairmanship in General Growth-spinoff Howard Hughes Corp. (NYSE: HHC), a companion REIT holding land and potential development properties that has also performed well.

What's next?
Ackman is always moving forward and has plenty of ideas to try to duplicate his General Growth success. One of his typical strategies is to take businesses he sees as inefficient and help free up their intrinsic value. For instance, his influence has arguably been instrumental in getting Fortune Brands (NYSE: FO) to break up its conglomeration of businesses through a combination of spinoffs and strategic sales.

But Ackman isn't a one-trick pony. With JC Penney, Ackman is going back to similar ideas that drove his investment in Target. And with conglomerate Alexander & Baldwin, it's unclear how he'll try to unlock the value in its widely disparate holdings, which include Hawaiian land, a regional shipping business, and commercial property.

Learn your lessons well
The key, though, isn't whether Ackman specifically will win or lose with his latest investments. Rather, the broader point is that even during market cycles in which stocks don't do as well as certain other types of assets, you'll always be able to find some winning stocks that provide excellent returns.

So even if a slowing stock market makes you feel like your money would work harder elsewhere, don't lose hope. With effort and tenacity, you can still identify great stocks that will buck even the most bearish of markets.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.