Sears as a Hedge Fund?

The prominent investor, Edward Lampert, who runs his own hedge fund in Greenwich, Conn., and is chairman of Hoffman Estates-based Sears, has has turned the largest U.S. department-store chain into an investment vehicle.

Cash holdings have doubled in the past year, and Lampert says he’s looking for acquisitions, perhaps outside of retailing. The investors in Sears Holdings Corp. are getting their payoff even as sales are falling. In the reported third quarter profit, more than half, $101 million of $196 million, came from investments as sales fell. Sears warned in its most recent earnings report, “These investments are highly concentrated and involve substantial risks.”

“At the end of the day, what you’re going to have is a publicly traded hedge fund” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based retail consulting and investment banking firm.

Lampert has proved adept at investing the company’s cash in financial assets. Sears had $2.1 billion in cash on hand at the end of the third quarter ended Oct. 28, almost double the $1.2 billion from a year earlier and down from $4.4 billion at the end of January.

Investors flocked to Sears after Lampert acquired the Hoffman Estates, Illinois-based chain for $12.3 billion in March 2005, combining it with his Kmart Holding Corp. Anticipating cost cuts and sell-offs of weaker stores, they sent shares up 35 percent between March 24, 2005, the day shareholders approved the merger, and Nov. 15.

Hedge funds and private equity funds are attracting billions of dollars from private investors giving them unimaginable financial strength in order to make friendly acquisitions. In some cases they use these funds to position themselves, even in a hostile manner, commanding significant stakes in large companies where they perceive the management is not doing a good enough job and that value can be extracted by using shareholders’ rights to push for changes in management.

Hedge Funds Sued by Attorney General

State Attorney General Eliot Spitzer sued Samaritan Asset Management Services Inc, their advisors, Johnson Capital Management Inc, and Edward Owens, a principal at the hedge fund.

The company allegedly engaged in a fraudulent mutual fund market-timing scheme. The defendants secretly “piggy-backed” their trades on the investment accounts of retirement plans. The suit claims that the market timing trades hurt long-term investors and the suit seeks restitution and an order to stop them from carrying out improper trades.

Last month Spitzer also sued the mutual fund manager J. & W. Seligman for the same practice, contending that it owes investors $80 million in compensation for improper market-timing trades. In July, Waddell & Reed Financial Inc., one of the nation’s oldest mutual fund management companies, agreed to pay $50 million to settle Spitzer’s investigation into improper trading.

That was the 19th settlement for Spitzer since he began the mutual fund investigation in 2003. Investors have received $3.4 billion in restitution under the settlements, Spitzer said.

Market timing involves rapid in-and-out trades that can disadvantage ordinary shareholders by diluting the value of their shares. It’s not illegal but it’s prohibited by many funds, as any standard that favors one investor at the expense of another tends to undermine the credibility of the industry.