Hedge fund manager Daniel Loeb, who took a five percent stake in Yahoo in September, is now demanding co-founder Jerry Yang step down.

Loeb also disclosed that the biggest single investment of his $7.7 billion Third Point Capital is in the Sunnyvale, Calif.-based search engine and media company. That would value the New York investor's stake around $1 billion.

Third Point demanded two board seats at Yahoo and suggested it might wage a takeover fight. Previously, activist investor Carl Icahn, who has waged proxy fights at technology companies including Motorola and Mentor Graphics, took a stake in Yahoo but sold it after Carol Bartz came in as CEO.

Third Point first invested in Yahoo in early September right after Bartz was fired. At the time, Loeb said the company had been mismanaged, had highly profitable services and businesses and should either be sold or carved up.

Now, Loeb said, efforts by Yahoo's Chairman, Roy Bostock, and acting CEO, Tim Morse, to explore options have been unwise. The company has signed nondisclosure agreements with private equity companies, thought to be Silver Lake Partners and Providence Equity Partners.

Management should not have permitted Yang, a former Yahoo CEO, to talk with any potential acquirers given his history, Loeb said in a new letter to the board. Yahoo rejected a $40 billion takeover bid from Microsoft in 2008.

At a bare minimum, Mr. Yang must declare whether he is a buyer or a seller, Loeb wrote. He cannot be both. The hedge fund manager said he would welcome the prospect of some of the private equity firms in a new Yahoo, minus Yang and Bostock.

Yahoo has retained Goldman Sachs and Allen & Co. for investment advice. The company has suggested divesting its minority stakes in China's Alibaba Group and Yahoo Japan, both valued in the billions. When the company announced third-quarter results Oct. 18, Morse declined to discuss alternatives.

Yahoo shares have jumped nearly 25 percent since Bartz's ouster. They traded Tuesday afternoon at $15.84, valuing the company at $20.08 billion.

Loeb said he might seek as many as two board seats at Yahoo's next annual meeting.