By  on May 16, 2005

Flush with cash, but fearful of not making returns on it, or worse, having to give the money back, the hedge funds as well as the private equity investment firms are taking keen interest in the retail and fashion segments.

Private equity players are trolling the sector for acquisition targets while the hedge funds are upping their investment stakes. But it’s not all wine and roses. This intensified interest in retail and fashion is changing the dynamics of the business, and some analysts predict diminishing returns for all investors as a consequence of this investment trend.

But with nearly $120 billion to invest, the hot fashion and retail sectors seem to be anything but a passing fancy to the hedge funds and private equity players. And for the retailers, designers and suppliers that are the targets of their investments, it’s hard to resist a cash boost from the big cats with their fat wallets.

“If you want to know why retail is the flavor of the month, look to Edward Lampert,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm.

Lampert, chairman of ESL Investments, engineered the Kmart-Sears merger earlier this year, less than two years after bailing out the discounter from bankruptcy proceedings in 2003.

Hedge funds get their name from the ability to utilize different investment strategies to “hedge” against market downturns, sometimes using return-enhancing strategies such as leverage, derivatives or arbitrage. The funds provide an alternative to investors seeking capital appreciation and even capital preservation during bear markets.

But as the funds have become flush with cash, they’ve definitely taken a keener interest in retail, and nowhere is this more evident than in the trading volume around the monthly same-store sales reports.

“I think that the hedge funds are making it a difficult chore for retailers to meet those monthly expectations that sometimes aren’t possible. Retail operates more on a long-term horizon, with companies generally hoping to meet their goals through internal growth and acquisitions,” observed Walter Loeb, a former retail analyst and now consultant at the firm that bears his name.

Loeb views much of the hedge fund trading activity as a potential negative for retail.

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