Sears: A Hedge Fund with No Fees
By Graham Summers
June 20, 2007

Eddie Lampert may be the best living investor today.

Since 1988, his hedge fund, ESL Investments, has shown investors average annual returns of 29%, beating Warren Buffett and practically every other investor on the planet.

Among those who've benefited from Lampert's track record are Texas billionaire Richard Rainwater, media mogul David Geffen, Dell founder Michael Dell, and the Tisch family.

Most ESL investors keep mum about their success with Lampert. However, Geffen once claimed that he made more money with ESL than from every business he ever created and sold combined.

ESL is open to new investors. However, you can only join by personal invitation from Lampert himself. The minimum investment is $20 million. And you can't touch the money for five years.

On top of this, you'll be handing over 2% of your total investment in fees as well as 20% of all potential profits. In light of these fees and Lampert's reputation, it's small wonder that he was the first hedge fund manager to clear the $1 billion mark in annual income in 2005.

If you're still set on investing with Lampert, there is a much cheaper alternative: buy Sears Holdings (SHLD)...

Lampert took hold of Sears via its 2004 $11 billion merger with Kmart. At that time, Lampert was Kmart's chairman, having taken the company from bankruptcy to a cash cow. Following the merger, Lampert became the chairman and CEO of the combined company.

Don't let the brand names fool you. Sears is not just a retail company anymore. In Lampert's own words it's a "$55 billion start-up."

Lampert's comments and improved returns to shareholders have prompted speculation that he will use Sears Holdings much as Warren Buffett used a textile company called Berkshire Hathaway as an investment vehicle rather than a retailer. Lampert has certainly shifted the company's focus from growing sales to increasing its returns to shareholders.

He's more than doubled its cash flow from $1.1 billion in 2004 to $2.3 billion in 2006. He's also drastically improved earnings per share, thanks to substantial buybacks: In 2006, SHLD repurchased $16 million worth of stock. Its current repurchase plan allows for an additional $604 million.

Lampert has also decreased SHLD's long-term debt by $300 million (14%), closed 52 underperforming stores, and increased gross margins from 24% to 28%. SHLD's share price reflects the improvements: It's up 70% since Lampert took the reins.

A minimum investment in Lampert's publicly traded hedge fund is $175 (one share) and there are no fees. It's one of the few chances to invest with Lampert directly.

More to come on Sears in our next essay. Until then...

Good trading,

Graham