FORTUNE — Julian Robertson, the hedge fund legend, yesterday revealed a new stake in whipping-boy-cum-recovery-story American International Group. These days Robertson only invests his own money, but news quickly spread that the “father of hedge funds” was making a hefty bet. AIG shares promptly spiked 4% during trading yesterday.
Robertson’s stake forces other institutional investors to ask themselves: is it finally okay to buy AIG? You see, owning AIG is something few professional investors can do. First, the stock is about twice as volatile as the market. Who wants that kind of uncertainty in their fund? Second, AIG is an endlessly complicated company, with carried-over tax credits and other balance sheet designs that confound even the most skilled analysts. Third, institutional money managers have difficulty explaining AIG to their bosses, so much so that they would rather avoid the stock altogether.
“It’s a very hard company to understand,” says Jim Ryan, senior analyst at Morningstar. “As they say, no one’s ever been fired for holding IBM.”
Of the top 10 U.S. Insurers (excluding Warren Buffett’s conglomerate Berkshire Hathaway (BRKA)), AIG ranks dead last in institutional ownership. Just 61% of its publicly available shares are owned by big investors. That compares to MetLife (96%), Prudential (66%), Travelers Co. (90%), Aflac (68%), Chubb Corp. (89%) and Allstate (79%). Similarly, AIG reported only 762 individual institutional owners as of this week, a low figure for a $54-billion company. MetLife, which is smaller, had 1,320; even Travelers had 1,219. (AIG does have a smaller percentage of its shares available for trading than most other insurers. But those publicly traded shares still number more than 730 million—similar in scope to MetLife—as the government has sold off its stake to where it now owns 53% of the shares.)
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This is the natural order of a recovery story like AIG’s. Regular investors flee after the stock crashes. Deep value players, like hedge funds or focused mutual funds, swoop in. Fairholme Fund’s Bruce Berkowitz was an early buyer. Then, the company’s financial progress eventually attracts masses of other investors, by which time a company’s recovery is complete.
AIG has yet to prove that its life and property and casualty insurance businesses are solidly profitable for the long-run. Still, it’s stunning how few managers are willing to bet on AIG, which has already risen 40% this year.
Late last year at a New York banquet, a mutual fund manager told me he couldn’t stop thinking about AIG’s cheap valuation. It had traded, and still does, at 0.5 times its tangible book value. He was comfortable that the government had fixed AIG’s most glaring problems. But he said he couldn’t bring himself to buy it. He knew he couldn’t answer all the questions his investment committee would ask, and so he stayed clear.
AIG shares will reach a tipping point eventually, says Standard & Poor’s equity analyst Cathy Seifert, when institutions rush to own them. It may happen when AIG is once again considered for inclusion in a major index like the Dow Jones Industrial Average. (It was kicked out the Dow in 2008.)
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Now that some smart investors are buying AIG, says Seifert, it’s up to the insurer to keep growing earnings. “At this point, AIG has to show some underlying fundamental improvement to keep this momentum going,” she says, referencing its stock’s 40% rise this year. Then she pauses. Or, she says, it could keep rising if “you start to see institutions deciding they need to hold the stock.”
Either way, more big investors will eventually pile into AIG, and its rags to riches recovery will be complete.
Update: An earlier version of this story said AIG was dropped from the S&P 500 index in 2008, which is incorrect. It was only removed from the Dow Jones Industrial Average.