Hedge fund demands sale of Sunterra Corp.

Chapman criticized the company’s management on a wide range of issues, saying in a letter,”Various market sources have conveyed burgeoning interest from both strategic and private equity bidders interested in acquiring Sunterra,”the letter was filed with the U.S. Securities and Exchange Commission.

Robert Chapman is founder of Los Angeles-based takeover and turnaround shop Chapman Capital, it is a $300 million activist hedge fund headed by the former Goldman Sachs trader. The hedge fund demanded earlier in the month that another company, Carreker Corp. put itself up for sale. The company in response said it was already looking at strategic alternatives, including a sale.

The former Goldman Sachs star was able to impose investor lockup provisions and early withdrawal penalties that were previously unheard of in the hedge fund world, further blurring the line between trader and owner.

One reason for the growth of activist strategy is the decline of merchant banking on Wall Street. According to Charles Gradante, managing principal of advisory firm Hennessee Group, investment banks such as Goldman Sachs, Lehman and Lazard have been less inclined to take long-term stakes in public companies since going public themselves. And where investment houses once exerted influence as agents for mezzanine finance, that type of lending is now often handled by private equity funds.

Many hedge funds such as Chapman are also on the rise due to large amounts of cash that many companies are carrying on their balance sheets. The sums are tempting to managers dreaming of stock buybacks and other shareholder-friendly moves. The strategy’s proliferation causes a snowball effect, too: the more activists there are, they more power they can wield as groups.