New York-based MMI, run by partners Clay Lifflander and Jerome Lande, has been liquidating its portfolio and has stepped away from all investments over the past several weeks, the sources said.

In 2010, MMI urged long-time takeover target Applied Signal Technology to solicit buyout offers, resulting in a $490 million sale to Raytheon Co (>> Raytheon Company). MMI was also behind the $506 million sale of satellite company EMS Technologies to Honeywell International Inc (>> Honeywell International Inc.) last year.

It was not immediately clear why the fund is liquidating, but one of the sources said it was a personal decision among people in the partnership group and was an amicable breakup.

Representatives for the fund were not immediately available for comment.

In one of its most recently disclosed investments, MMI took a 3.3 percent stake in communications equipment maker Comtech Telecommunications Corp (>> Comtech Telecomm. Corp.) last fall and sought a sale of the company and board representation. In November, the fund abruptly withdrew its nominations of two director candidates for Comtech's board.

The activist fund had a mixed track record in its investments last year -- which typically involved taking a minority stake in companies and urging them to consider a sale.

Last summer, MMI amassed a near 10 percent stake in Kratos Defense & Security Solutions (>> Kratos Defense & Security Solutions, Inc), spurring a strategic review by the company that did not result in any deal.

MMI also failed to convince the board of Checkpoint Systems Inc (>> Checkpoint Systems, Inc.) to explore strategic alternatives.

The aerospace and defense sector has seen increasing shareholder activism over the past years as stocks languish across the board amid worries about severe budget pressure.

(Reporting by Nadia Damouni and Soyoung Kim; Editing by Gary Hill and Matthew Lewis.)

By Nadia Damouni and Soyoung Kim