“Fast” Eddie may end up saving Sears

May 17, 2012, 10:38 PM UTC

Eddie Lampert

FORTUNE – It was far from fast. But hedge fund manager Edward Lampert may end up pulling off a turnaround at Sears Holdings (SHLD) in the end. The troubled retailer, which owns the Sears and K-Mart chains as well as apparel brand Land’s End, now looks likely to keep its doors open, at least for the next year and quite possibly much longer.

On Thursday, the company, of which Lampert is the chairman and largest shareholder, said it made $189 million in the three months that ended April 28th. Its stock jumped 8% on the news, and at mid-day was trading for around $55. What’s more, the company’s finances appear to be strengthening. The company’s capital position may grow $1.7 billion in the next year. All told, Sears’ shares are now up about 60% since the beginning of the year.  Not bad for a company that seemed to be on everyone’s list for the next major bankruptcy.

What happened? To be fair, Sears is still far from healed. All of the company’s recent profits and then some – $233 million worth – came from selling off stores and other real estate holdings. But its continuing operations showed some improvement as well, losing just $32 million, less than a quarter of the $142 million it lost in the same time a year ago. Sales shrunk, but only slightly, and less than analysts had expected.

The company appears to be benefiting from focus, and a better economy. Earlier this year, the company said it was selling off its Hometown and outlet stores. It also decided to close a line of smaller hardware stores the company was opening to take advantage of its Kenmore, DieHard and Craftsman brands. That didn’t seem like a bad strategy. But sometimes focusing on your core business is more important than growth. Rather than trying to plan new businesses, the company is now sprucing up its main stores and has developed a program Shop Your Way Rewards that will give the company more information about its shoppers and what they want. These are the types of things the company should have done a while ago, but get lost when executives are thinking about expansions.

There seems to be something else going on as well. There have been a lot of people questioning the value of hedge funds recently. The funds, that cater to high-net worth individuals and pension funds, have underperformed the market for the past three years in a row, and, as of the end of March, were trailing the market again in 2012. What’s more, a recent study by former hedge fund investor Simon Lack found that in the 12 years ending in 2010, the average investor got only 3% of the average gain of hedge funds. The rest went to the highly (over) compensated managers of the funds.

If a turnaround does happen at the retailer, I think a lot of the credit will have to go to Lampert. He has stuck with the shares, providing support for the company. And he has pushed the company for change. When one strategy hasn’t worked out, he’s agitated for another. And he has booted management relatively quickly when things weren’t working out. It hasn’t been pretty. Some have dubbed Lampert’s involvement in Sears as a slow moving train wreck. Yet, the latest strategy to shrink the stores and quite possible the brands is something few executives, who are usually solely focused on growth, would do if there weren’t a hedge fund pushing to boost the company’s shares. A private equity firm might have been able to pull off this type of turnaround as well, but with more leverage. Would Sears have survived 2008? Who knows?

Yesterday, at the Ira Sohn Conference, Bill Ackman was taking about how he is sticking with J.C. Penney, and how he helped to bring in an CEO Ron Johnson from Apple who looks to be making positive changes at the company. I have written that hedge funds may never return to glory because too many of them have become short-term trading vehicles. Both of these examples argue the opposite, though they may still be the exception. Nonetheless, what they do show is that hedge funds deserve a place in the economy and the market, though not as big a place as they have now.