Smart money' doesn't look so smart these days

Date: Friday, November 30, 2007
Author: Matt Krantz, USA Today

Thursday, shares of Sears Holdings (SHLD), the centerpiece of hedge fund manager Edward Lampert's empire, cratered $12.25, or 11%, to $104.09 after the retailer reported 99% lower quarterly earnings. The shares have tanked 39% the past 12 months, while the Standard & Poor's 500 has gained 6.0%.

The harsh reception toward publicly traded pieces of investments controlled by hedge funds and private-equity funds shows how public investors are souring on the idea that the managers of the funds have something special that lets them beat the market, says Brendan Gilmartin, equity analyst at Thomson Squawk Box. "Smart money doesn't look so smart based on recent investments," he says.

Public investment vehicles of private investors that are now struggling include:

•ESL Investments. Lampert's investment company, which controls Sears, isn't getting the expected improvement from the retailer. Sears can only blame the economy so much. The dramatic drop in earnings at Sears is partly the result of cautious consumers, says Charles O'Shea, retail analyst at Moody's, but "a lot of this is self-inflicted." Shares of rivals Wal-Mart (WMT) and Target (TGT) are essentially flat.

But ESL's woes go beyond Sears. It owned 27 million shares of Citigroup (C) at the end of September, for which it had paid from $49 to $54 a share, Gilmartin says. The stock now is below $33. Investments in Home Depot (HD) and AutoNation (AN) have also fallen in value, Gilmartin says. Lampert, through a spokesman, declined to comment.

•Blackstone (BX). The giant private-equity firm has been a dismal performer on Wall Street ever since its initial public offering in June. Investors who bought the shares at the first day's close are down 37%. And investors who got shares at the IPO price have lost 29%. The company, which used low-cost debt to buy companies and sell them for a profit, has been hit directly by the credit squeeze that has driven up borrowing costs, says Eric Fitzwater, senior analyst at SNL Financial.

High debt costs have quashed the private-equity binge. The dollar value of private-equity deals in November is down 97% from a year ago, Dealogic says.

•Public hedge funds. Fortress Investment Group (FIG), billed as the public's first way to buy into hedge funds, is down 44% from its first-day close and 5% from its February IPO price. And rival Och-Ziff Capital is down 18% from its first-day close and 22% from its IPO price.

The poor returns are reminders that even smart people can't always outsmart Wall Street, Gilmartin says. "We're now starting to see a lot of smart-money firms and their extreme subpar performance coming to light," he says.

Contributing: Mindy Fetterman