Lampert hedge fund picks are off, money still flows

By Svea Herbst-Bayliss

BOSTON, Aug 13 (Reuters) - Edward Lampert, long ranked among the world's best-performing investors, may be enduring a rough patch, according to hedge fund industry investors with knowledge of his fund ESL Investments.

Like other big names in the loosely regulated $1.75 trillion industry, the current market volatility is a threat to Lampert's stellar record, particularly given his focus on a few major holdings, they said.

In 19 years, Lampert has treated his investors to annualized returns of 24 percent, after fees, and lost money only twice, in 1990 and 2002.

In 2003 he roared back with a 45 percent gain only to outdo himself with a 54 percent gain in 2004.

But this year may be different, hedge fund industry investors and analysts said pointing to what little outsiders know about how Lampert, chairman of publicly traded Sears Holding (SHLD.O), structures his secretive $15 billion investment fund.

"With these conditions you can't assume that anyone is safe, not even him," said one hedge fund investor, who is familiar with ESL but not authorized to speak publicly about it.

For years, the fund's two top positions made up 40 percent of the portfolio while the top five positions made up over 70 percent. Based on that formula and that Sears, AutoNation (AN.N) and AutoZone (AZO.N) -- ESL's top three holdings at the end of 2006 -- are down or flat this year, industry analysts and investors suspect Lampert and his investors may be showing few gains or even nursing losses.

Lampert is also invested in Citigroup (C.N), whose share price has declined nearly 16 percent this year.

ESL does not report monthly numbers to industry trackers and a spokesman declined to comment on performance.

While Sears' shares climbed 5.6 percent on Monday after the board agreed to spend $1.5 billion to buy back shares, the shares are still 28 percent lower than they were four months ago when it hit a 52-week high of $195.18.

Sears, which trades at about 15.8 times projected per-share earnings, is more expensive than rival J.C. Penney (JCP.N) and money managers have attributed the premium to Lampert himself, often calling him the next Warren Buffett.

Lampert, who got his start on Goldman Sachs' (GS.N) trading desk, may find that title difficult to live up to, industry experts are nowhere near lumping him with the hedge funds now struggling with redemption calls.

"This is not the guy you have to be worrying about right now," said Philippe Bonnefoy, chairman of hedge fund advisory group Cedars Partners.

Indeed, investors are eager to put money with Lampert who told prospective clients that "ESL is considering undertaking a concerted capital raising effort for the first time since its launch," people familiar with the ESL document said.

The new money would let ESL continue to make "significant and concentrated investments in large public companies where significant returns can be generated," Lampert wrote in the document sent to prospective investors and obtained by Reuters.