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Hedge funds are stuck

Date: Wednesday, March 19, 2008
Author: Andrew Willis, Theglobeandmail.com

TransAlta is one of a growing list of Canadian companies that feature activist shareholders that took positions in a different era, and now face a world of pain as they contemplate heading for the exits.

A number of hedge funds, awash in cash, bought into underperforming resource plays last year, on the understandable logic that either the company could be fixed, or it would get snapped up in an M&A market gone mad. Before August, this was a winning strategy.

The ever-deepening credit crunch turns this market dynamic on its head. Takeovers are rare, corporate fixes are tougher to pull off, and many hedge funds need to raise cash as banks cut their leverage. It's always difficult to sell large positions in relatively illiquid companies, it's even more costly in a volatile market like this. So want to see fireworks? Keep an eye on these companies:

- FNX Mining, a $2.3-billion nickel play that features a screamer of a shareholder in hedge fund York Capital, which has been pushing unsuccessfully for the sale of the company since November, and holds a 19 per cent stake.

- Amber Capital holds 13 per cent of Skye Resources, another nickel miner, with a $400-million market cap. While the fund claims to be a value player, it likely would have been happy to see last year’s strategic review result in a sale, rather than the status quo.

- Compton Petroleum, a $1.5-billion natural gas company, went up for sale last month at the behest of 20-per-cent shareholder Centennial Energy Partners, but it’s not at all clear a buyer will emerge.