High risk, high return

What do this four local companies have in common? Their largest shareholder is a hedge fund. Get used to it.

CEO Don DeFosset and his board of directors call the shots at Walter Industries.

Or used to, anyway, until a pair of aggressive shareholders, hedge funds both, began throwing their weight around this week.

Split the company into three pieces, one hedge fund publicly warned the Tampa company Wednesday, or we'll toss you out and install our own board. Ditto, said a second fund, if more gently. Together, the two account for nearly 21 percent of Walter's stock.

By Thursday, the company's initially defiant tone had softened.

Hedge funds - the high-risk, high-return investment vehicles that are hard to define and enjoy favor among the wealthy - are growing. And some of the country's largest ones have quietly established a beachhead in the Tampa Bay area.

Caxton Associates, ranked the seventh-biggest hedge fund by Institutional Investor's Alpha magazine, has its hooks in Checkers Drive-In Restaurants of Tampa and air-filtration maker Flanders Corp. of St. Petersburg. Sixteenth-ranked Cerberus Capital Management, named after the mythological three-headed dog who guards the gates of hell, owns Walter stock and a majority stake in bottlemaker Anchor Glass Container Corp. of Tampa. Pequot Capital Management, ranked 44th, holds stakes in transportation-logistics company Segmentz Inc. of Tampa and employee-screening company First Advantage Corp. of St. Petersburg. Ahab Partners owns chunks of Anchor and manufacturer Reptron Electronics Inc. of Tampa.

As a result, today no fewer than seven bay area companies have a hedge fund as their No. 1 investor, with stakes ranging from 10 to 59 percent. They include: technology manufacturer Paradyne Networks Inc. of Largo; First Advantage; electronic instruments maker Technology Research Corp. of Clearwater; and Anchor Glass, Reptron and insurer WellCare Health Plans Inc. of Tampa.

But what that means cannot be generalized. The aggressive nature of hedge funds, which aren't regulated by the Securities and Exchange Commission and are free to pursue any investment strategy they like, can bring a certain amount of volatility along with all that cash. But not every hedge fund threatens a proxy fight within months of buying into a company.

The only real certainty is that money is flowing freely.

"The marketplace is flush with capital in search of opportunities," said Barry Alpert, an investment banker at Raymond James & Associates in St. Petersburg.

"Hedge funds are ubiquitous," said Marty Traber, a corporate finance lawyer at Foley & Lardner in Tampa.

Thanks in part to high-profile blitzes like this week's at Walter Industries, hedge funds have earned a reputation over the years as aggressive investors who seek short-term gains and can make CEOs quake in their boots. Some are seen as predators who feast on small, troubled companies.

It's no secret that when a company is sued by shareholders after a precipitous stock-price fall, hedge funds often swoop in. That's what New York hedge fund Okumus Capital LLC did with call-center operator Sykes Enterprises Inc. of Tampa in 2000.

"This isn't Fidelity's 8 percent fund, you know?," Traber said. "They do intend to make, and do have the authority to take short positions, derivative positions, and all the positions you can creatively think about to create a return."

But hedge funds are becoming much more versatile, and thus blurrying the line between them and more traditional investment funds.

Hedge funds helped Tampa Bay Buccaneers owner Malcolm Glazer buy the British soccer club Manchester United this month by loaning him about $500-million. Hedge funds are footing $250-million of the bill for a proposed merger of America West and US Airways. Foley's Traber said he has arranged hedge fund loans for some of his small, publicly traded clients.

"They are moving into the same area that the private equity firms were in in the past," said Gordon Tunstall, a Tampa consultant who helps entrepreneurs raise cash. "Their (funding) process is very rapid."

Traditional Wall Street investment managers are creating their own hedge fund subsidiaries. The country's third-largest hedge fund today, for example, is run by Goldman Sachs.

A growing number of hedge fund managers are willing to make long-term investments, so long as the return is high. If satisfied with a company's management, they may be willing to sit passively in the background, as mutual funds often do. Some seek representation on a company's board of directors; some don't.

Technology Research CFO Scott Loucks said he didn't know his company's top shareholder, Gruber & McBaine Capital Management LLC, was considered a hedge fund until a reporter inquired. It's not that unusual anymore. Hedge funds have become sufficiently diverse that the name, which came from using the funds to "hedge" against market losses elsewhere, has lost meaning.

Steve Raymund fits the profile of the hedge fund investor. The chairman and CEO of Clearwater computer distributor Tech Data Corp. earned salary and bonus of $3-million in 2005 and exercised stock options worth $3.7-million. He said he has invested in a couple of hedge funds, which he called "damn expensive."

"They can use leverage and they can go short and employ other exotic (measures) to maximize return to shareholders, but I don't think there's anything disreputable, per se, about hedge funds," Raymund said. But as their popularity grows, he said, their profitability is likely to regress.

Still, hedge funds will be hedge funds.

Steel Partners II LP, which owns a 3 percent stake in Walter Industries, is leading a shareholder revolt against the management of New York equity management firm. In a news release Thursday, the company issued a warning to other investors about Steel Partners' chief Warren Lichtenstein, calling him a direct competitor with a conflict of interest, a corporate raider who pretends to be a long-term investor.

"Please do not be fooled," BKF wrote. "Steel Partners is not primarily interested in corporate governance or in representing the interests of all stockholders. It is in this contest to further Mr. Lichtenstein's personal interests."

Paradyne may have best summed up the potential consequences of drawing the attention of a hedge fund investor when it made reference in its annual report to No. 1 shareholder Bricoleur Capital Management Inc., which owns a 22 percent stake.

"Entities associated with Bricoleur ... may be able to exercise substantial control over us, subject to the fiduciary duties of its representatives on the board of directors," the company wrote. "The interests of Bricoleur Capital Management, LLC may not always coincide with the interests of other stockholders."

Times researcher Caryn Baird and staff writer Jeff Harrington contributed to this report. Scott Barancik can be reached at barancik@sptimes.com or 727 893-8751. Helen Huntley can be reached at huntley@sptimes.com or (727) 893-8230.