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Private equity firms continue to stage landings on the hedge fund beachhead. Following the lead of Texas Pacific and more recently Kohlberg Kravis Roberts, the Blackstone Group announced the creation of a new hedge fund that will focus on long/short equity. It's the firm's second hedge foray; a distressed investing vehicle launched in December 2004 currently runs $600 million. Blackstone is already one of the largest funds-of-hedge-funds managers, with about $12 billion under management. Its single-manager effort is still relatively new.

Blackstone hired Manish Mittal, a managing director at $10 billion hedge fund Perry Capital, to lead the new venture. Prior to Perry, Mittal worked at two other major hedge funds: Kingdon Capital Management and SAC Capital Advisors. He started his career as a private equity analyst at

Goldman Sachs



Take Off

Boston-based Highfields Capital Management, an $8 billion activist hedge fund partly credited for uncovering fraud at Enron, hit a wall with the Toronto Stock Exchange last week. The fund manager, owner of 4% of Great Canadian Gaming Corp., sent a letter to both the company and to the Toronto Stock Exchange in which it raised questions about the gaming company's plan to sell a 10% stake at a deep discount to CEO Ross McLeod.

In the letter, Highfields said that it believed that the transaction was a violation of Toronto Stock Exchange rules regarding pricing and private placements. One argument was that the exchange prohibits such discounted private placements unless approved by shareholders. Highfields was also basing its analysis on

New York Stock Exchange

rules that require shareholder approval for the issuance of more than 1% of the shares to an insider. In the end, though, the Toronto exchange ruled the Great Canadian transaction kosher. Arguably, the finding is counter to the recently fashionable belief that Canadian markets are activist-friendly.

Gaming the Spread

This column discussed

Eagle Materials


last week and how the price differential between its two different share classes represented an arbitrage possibility, at least for those who bought the B shares at a discount before the company announced plans to combine the two shares into one.

Here's a similar situation:



, whose class B shares trade on the NYSE under SYMBOL GME-B. In this case, there is no plan to collapse the shares, at least not yet; as a result, the discount is substantial. At approximately $45, the B shares trade at almost a $4 discount to the A shares. The two share classes have different voting rights, but the real reason for the discount is that the B shares are much less liquid than the A shares. In the past three months, average daily volume was 97,800 for the B shares versus 1 million shares for the As. It's a big difference. Still, the B shares offer some significant value, and if the company ever decides to combine both classes, a great arbitrage opportunity.

Loosely Managed

Everything seems to be falling apart at

BKF Capital Group


. At $10, the stock is at its 52-week low, which is interesting considering that the name is a pure activist play. Carl Icahn, as of December, had more than 14% of the shares. Cannell Capital Management and Steel Partners hold 9.50% and 8.77% of the shares, respectively.

Will those hedge funds be able to turn things around? They did last year when they won board seats and removed CEO John Levin. But since then, things have been chaotic and the asset-management business has been bleeding talent, particularly on the hedge fund side of the business, the crown jewel of BKF. The problems began in October with the unwinding of the event-driven portfolios, which generated approximately 41.3% of the company's 2005 revenue. The stock fell to $17 from $24.

Last week, the company announced the liquidation of portfolios run by Seth Turkeltaub and Richard Lodewick, two managers who ran $615 million and generated approximately 20.4% of the company's revenues in 2005. They are now leaving. Last Monday, the stock dropped by 16% on the news, to $10 from $13. One may wonder if Icahn is ready to cut his losses here.

Gartmore UK

The sale of Gartmore U.K., the British asset-management arm of Columbus, Ohio-based insurer


( NFS), is under way. The parent company decided last November to sell the U.K business and to retain its U.S. operations in an effort to focus on the domestic market. Asset-management valuations are quite high, and Gartmore U.K has posted strong performance over the past couple of years, partly due to the strength of its London-based hedge fund business. A person familiar with the sale says that a deal is near and that an announcement should be made over the next few weeks.

Another Frontier

There's been a flurry of Islamic-focused hedge funds, in which banks and large institutions, especially in Europe, try to profit from the growth in the Middle East. The funds also often work hard at reaching pockets of wealthy Islamic investors. Last week, Fortis, a Belgium-based bank, launched the Arabia Fund, a fund of funds investing in hedge funds located in the Gulf region. Other institutions, prior to Fortis, have gone as far as launching Shariah-compliant hedge funds, which invest in accordance with the strict Islamic law. In February, Gabelli rolled out Gabelli Shariah Merger-Arbitrage Fund. In 2002,



created Noriba, a Bahrain-based subsidiary specializing in developing Shariah-compliant products.

It's a logistical nightmare to put together such vehicles because Shariah law prohibits profiting from debt and interest payments. In addition, the funds cannot invest in companies that generate profits in relation to certain products, such as pork, alcohol or gambling. The Arabia Fund will invest in the Middle East, but will be spared the complications of having to comply with Shariah.