Hedge Funds With Stock Symbols

Ever heard of David Geffen, the big Hollywood record producer?

Geffen started Asylum Records in 1970 and made millions selling records by artists like Bob Dylan, Linda Ronstadt, The Eagles, and Joni Mitchell.

In 1980, he started Geffen Records and made even more millions selling titles by music groups like Nirvana, Guns ‘N’ Roses, and Aerosmith. He made $710 million selling that business before becoming a film producer, creating hit movies like Little Shop of Horrors, Risky Business, and Beetlejuice. He then went to Broadway, where he backed the hit musicals Dream Girls and Cats.

In 1994, he co-founded DreamWorks movie studios. He got $175 million when DreamWorks sold its live-action unit for $1.5 billion and a $350 million stake when its animation unit was spun off into a separate public company.

Geffen does all the things you’d expect from the super rich. He collects art. Last October, he sold two paintings from his collection for a total of $143 million. He gives millions of dollars away to charity. He gave UCLA Medical School $200 million. And he says he’s going to give away all the money he makes from now on. Geffen recently bid $2 billion for the Los Angeles Times, but the negotiations are ongoing, and there’s a competing bid from Chicago real estate mogul Sam Zell.

Forbes.com says David Geffen is worth around $4.7 billion... making him the richest person in the entertainment industry (richer than Oprah, Tom Cruise, and Stephen Spielberg).

But at least $1 billion of David Geffen’s fortune – more than one fifth of it – didn’t come from any of his business activities. In 1991, Geffen invested $200 million in a hedge fund.

Hedge funds are special private investment funds that are less regulated than mutual funds. They all charge big fees, and some of them have been enormously successful. Lots of famous people, like David Geffen, invest in hedge funds. Michael Dell, the billionaire behind Dell Inc., is a hedge-fund investor. So is Arnold Schwarzenegger, star of the Terminator movies and now governor of California.

About 8,000 hedge funds operate today, but the one David Geffen invested in wasn’t just any old hedge fund. It was ESL Investments, run by Edward S. Lampert. According to a recent article in Fortune magazine, Lampert has made Geffen more than $1 billion. But get this: Every now and then, Geffen took money out of the fund because he wanted to diversify his investments. Had Geffen not taken any of his money out of Lampert’s fund, he’d have more than $9 billion today.

Just by investing with the right hedge fund, Geffen has made more than $1 billion, and he could have made more money than he made on all his other business ventures and investments combined.

There’s one little problem with hedge funds, though. They’re generally for the very rich, and they usually have very high minimum investments. To get into Lampert’s fund, the minimum investment is $10 million. And you have to leave your money there for at least five years!

Hmmm... if only there were some way for investors with smaller amounts of money to invest with a great hedge-fund manager...

There is a way. There are stocks you can buy that are very similar to buying into hedge funds. And several of them are run by some of the great money managers of our time.

And, unlike hedge funds, stocks don’t come with big management fees. And you can take your money out any time you want.

For example, say you wanted to invest with Eddie Lampert, but you don’t have $10 million to put into his hedge fund. You could just buy shares of Sears Holdings (SHLD).

Eddie Lampert merged Sears with Kmart in 2003 and turned the company into a financial powerhouse, worth more than $25 billion today. Lampert’s firm owns more than 40% of Sears, and Lampert is chairman of the board. Since 2003, Sears shareholders have made more than 11 times their money, thanks to the presence of Eddie Lampert. Sears goes for more than $170 a share today.

Another example is the greatest hedge fund in history – Warren Buffett's holding company, Berkshire Hathaway (BRK-A). Berkshire shareholders have made about 21% a year for 40 years – a phenomenal investment performance. We recommended the stock in Extreme Value in July 2005. It's up about 29% since then.

Berkshire is loaded with nearly $90,000 per share of investments. It owns 60 or so businesses assembled by the greatest investor who ever lived. And it's growing faster than just about any large cap stock you can name. Most value experts agree that Berkshire is worth around $150,000 per share these days, and it's trading around $110,000 per share.

As Sears and Berkshire shareholders have learned through the years, owning the right "hedge fund" is one of the greatest ways to compound your wealth that exists today.

Good investing,