Hedge fund Baupost seeks profit in Canadian quarry

* Klarman's group takes stake in proposed mega-quarry

* Joins wider trend of buying nontraditional assets

* Project hinges on approvals; local residents oppose (In U.S. dollars)

By Allison Martell

TORONTO, July 13 (Reuters) - One of Boston's best known hedge funds is seeking profit but finding controversy with an investment in a proposed Canadian "mega-quarry" that would supply a crucial ingredient for concrete.

Baupost Group, led by closely watched value investor Seth Klarman, has taken a stake in Highland Cos, which bought up thousands of acres of potato fields north of Toronto and hopes to create one of North America's largest quarries.

The quarry would produced crushed limestone, a building material and ingredient in concrete. Its owners aim to profit from what they say is a looming shortage of "aggregate," the construction industry's umbrella term for sand, gravel and stone.

The investment marks one of the latest efforts by the hedge fund industry to seek profits beyond traditional investments like stocks and bonds.

"When you look at aggregate, the need is established, but the question becomes: Where are we going to get it from?" said Lindsay Broadhead, spokeswoman for Highland who confirmed Baupost's investment.

Baupost, which was reported last year to have $23 billion in assets, declined to comment on its stake in Highlands or how much it paid. Like most hedge funds, it does not widely publicize its investments and returns.

But Klarman's reported double-digit returns over more than two decades and his celebrated book on value investing -- "Margin of Safety" -- mean investors closely track his portfolio picks.

Klarman gave hints last year he was looking beyond traditional financial markets. He said at a conference in May 2010 that he saw few bargains in the stock market and warned it could suffer a decade of no gains.

He also warned he was particularly concerned about inflation and government's high rate of borrowing. Regulatory filings earlier this year revealed Baupost opened a position in Allied Nevada Gold Corp (ANV.A).

Concerns about the risks of inflation and soaring government debt levels have sent many investors in pursuit of so-called real or hard assets that will hold their value in an inflationary environment.

Canadian hedge fund manager Eric Sprott has made similar bets, urging investors in March 2009 to buy gold for $920 because of economic uncertainty. It has since soared to $1,590. He also oversaw heavy investments in Canadian farmland through Sprott Resource Corp (SCP.TO).

QUARRY FACES REGULATORY RISK

Klarman's investment is far from a sure bet. Government officials in the province of Ontario have began reviewing the project in process that could drag on for years.

The proposed quarry also faces opposition from the area's wealthy retirees, local farmers and the environmental lobby.

The quarry would extend below the water table, and its operators would have to pump 600 million liters of water each day to keep the mine, and later rehabilitated farmland, from becoming a lake.

"The main concern with everybody is the water issue," said Bill Hill, mayor of Melancthon, the Ontario township where the quarry site is located. Hill has yet to take an official position on the development. (With additional writing by Jeffrey Hodgson; Editing by Frank McGurty)