Why I Just Sold My Best-Performing Stock

Sometimes, names can be misleading. Consider hedge funds, for example.

The "hedging" in hedge funds' day-to day-operations sometimes generates more risk, not less. How much more?

Well, Long-Term Capital Management L.P. (LTCM), which had a great name that implied longevity and long-term thinking, had a fantastic team that counted not one but two Nobel Laureates in economics. Long-Term Capital Management ended up being relatively short-lived during the 1990s, lasting only about six years.

Fast forward two decades. The hedge fund industry is alive and well, having survived not only LTCM, but also the Great Recession, during which many funds closed. The industry has also weathered outright frauds such as the Bernie Madoff scandal.

The modern hedge fund world is diverse. Some hedge funds (defined as private investment pools available to qualified, or "accredited," investors) are similar, by composition, to mutual funds, albeit with more concentrated portfolios. Some invest in everything from stocks to bonds to real estate to gold and other commodities, and many continue using derivative strategies and hedging techniques. Leverage is not uncommon.

These days, many hedge funds invest (and trade) in equities, and it's normal to see a hedge fund or two among the top holders of many small-cap stocks.

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The funds that we often see holding a top position in a stock could either be of a long-short type, or they could be activist funds.

Activist hedge funds are the ones of the most interest to me in my premium newsletter, Game-Changing Stocks. These funds typically have the longest time horizons among hedge funds: When they see value in shares of a public company, value that cannot be realized until some of the current conditions change, these investors take matters into their own hands. They build a position, and then try to implement the desired changes. Activist investors could target management changes, company breakups, spinoffs, dividend initiations or increases, or even liquidations.

Often, these changes can lead to big-time gains for investors. Thus, when investing alongside an activist hedge fund, you are advantaged in a few important ways, to which you can also add strong research capabilities.

Hedge funds employ some of the best analysts in the industry.

Case in point: Our best-performing position in Game-Changing Stocks to date: MINDBODY (Nasdaq: MB), the undisputed leader in management software for the wellness industry.

Since our addition of MB to the portfolio, the market has been taking notice. At the time I issued my "sell" recommendation (I'll explain why in a moment), my readers and I were sitting on a 47.6% gain in five months.

Several hedge funds have been paying attention, too, as they built substantial positions in the stock. It has been a great stock not just for us, but also for a few hedge funds, such as Luxor Capital Group, LP, and Abdiel Capital Advisors LP.

The largest holder of MB is Luxor, with the ownership of more than 15% of shares outstanding -- making MB Luxor's fouth-largest position. And here's more evidence that Luxor really likes the stock: Filings show that the hedge fund has recently been reducing the size of each of its top seven positions, except for MB.