Hedge Fund Hell: CSX Could Derail

An activist hedge fund that's been waging war against the board of CSX(CSX) may be forced into retreat by the demands of its own investors.

After acquiring enough CSX shares to earn voting rights in a proxy dispute last year, The Children's Investment Fund Management, or TCI, could find itself in the awkward position of having to dump the railroad company's stock because of its own need for capital.

The result could be a blow to CSX's market value that is driven by insider shareholders rather than the company's fundamental performance -- exactly the opposite of what TCI set out to do.

London-based TCI partnered in 2007 with New York's 3G Capital Partners to wage war on CSX, arguing that the Jacksonville, Fla., railroad operator's board was too entrenched and had not served shareholders well. Between the two, TCI and 3G Capital have amassed more than 35 million shares of CSX, nearly 9% of the outstanding shares -- enough to secure four of the company's 12 board seats.

Now massive hedge fund redemptions and selling may derail TCI's plans. As pressure to maintain adequate capital grows, the fund could be forced to pare or abandon its position in CSX.

CSX is TCI's third-largest equity position and one of the best performers in its portfolio, making the stock a good candidate for liquidation if the fund needs to raise capital.

TCI purchased its entire stake in CSX -- nearly 18 million CSX shares worth about $558 million -- in the first quarter of 2007, according to regulatory filings. In the worst case scenario, TCI is down somewhere near 10% on its investment, though depending on the exact date it bought shares, the investment could be up slightly. The fund did not report its exact purchase date.