Over its 121-year history, Sears has been a watch seller, a giant mail-order business, a home builder and the nation's favorite retailer. And now, in 2007, it is becoming ... a hedge fund?

As strange as it sounds, this transformation of Sears is now in force. Its retail sales have dropped for five straight years, and managers complain about deteriorating stores. Meanwhile, Sears is pouring its money into risky, esoteric investments to generate huge returns for shareholders.

The man orchestrating this makeover is Edward S. Lampert, 44, who by many accounts is a brilliant and controversial hedge fund trader. As chairman of Sears Holdings, which includes Kmart and Sears Canada, Lampert is a startling example of the new avant-garde of Wall Street — alternative investors who have the power and money to acquire and radically transform large traditional businesses.

Lampert's management of Sears Holdings, the nation's third-largest retailer, has been a departure from long-established industry practices — using extra cash to improve stores or earn a small amount of interest. That has stirred anxiety among former executives who fear the iconic brand could be dying. Their concerns are being heightened by retail analysts who predict the company will shed hundreds of stores.

"I do think the company is in a spiral which, if it doesn't pull itself out of, is likely to face at minimum an uncertain future," said Arthur C. Martinez, who led Sears in the 1990s.

But, if Sears the Retailer is ailing, Sears the Hedge Fund has never been healthier. Hedge funds are massive unregulated investment pools typically open only to institutional investors and wealthy individuals. The company's stock soared 45 percent in 2006, driven by high-risk trades that produced $101 million, or a third, of Sears Holdings' pretax income in the third quarter. These investments did not perform well in the fourth quarter, and the firm had to sell off properties to cover its losses, according to a Morgan Stanley report.

"It's clearly not your traditional retail business," said William Dreher, a Deutsche Bank retail analyst who dubs the firm the "working man's hedge fund."

More than a few Wall Street analysts label Lampert "the next Warren Buffett," the billionaire investor, for having the insight to buy two troubled retailers, Kmart and Sears, on the cheap and then use their cash flows to fund his investments. In 2003, Lampert gained control over Kmart and helped it out of bankruptcy protection by cutting costs and selling off poor-performing stores. He announced an $11 billion buyout of Sears in 2004.

But some who have crossed Lampert in his dealings say he is ruthless. Traditional retailers add that they doubt whether Lampert's singular focus on profit can work in the long run — he may cut spending so drastically that stores will stop attracting shoppers.

Lampert's detractors point to a worrisome trend: Overall same-store sales for Sears Holdings have dropped for five years, with the Sears component performing particularly poorly. In 2006, sales at Sears stores dropped 6.1 percent, while Kmart sales were down 0.6 percent.

Under Lampert, Sears has spent far less on its retail business than competitors. Gone are the days of heavy television promotions such as the "softer side of Sears." The Sears Roebuck Foundation, the firm's charitable arm, has dried up in generosity, several Chicago-based institutions such as the Children's Museum report.

Hundreds of poor-performing stores are being allowed to deteriorate, according to analysts and interviews with store managers. A sign of this can be found in the company's financial statements. In 2005, Sears' first full year under Lampert, the firm said its buildings and other assets lost $1.1 billion in value, but it spent only half that maintaining and upgrading its properties.

Meanwhile, Lampert has amassed a war chest worth about $3.3 billion in cash. Some analysts speculate this is a prelude to making a huge acquisition. But others say Lampert will use the money for his trades.

It's hard to know for sure. Lampert is secretive about his company's direction, and he declined comment for this story.