Hedge fund manager Ed Lampert is cutting his losses on Citi (C). Lampert is best known for providing his investors with 20 percent-plus annualized returns since 1988, and for his efforts to turn around retailer Sears (SHLD) through a 2005 merger with Kmart. But 2007 wasn’t a good year for him - as shown by the action in Citi, where Lampert appears to have spent the year buying high and selling low.

Lampert cut his stake in Citi by 31 percent in the fourth quarter ended Dec. 31, according to a Securities and Exchange Commission filing. He held 19.1 million shares in the financial giant at year-end, down from 27.8 million shares in September. What’s more, Lampert made his sales during a quarter in which Citi’s shares were falling sharply, spending most of the period below the prices at which Lampert made his earlier purchases.

Before the latest quarter’s stock sales, Lampert had spent more than a year accumulating shares of Citi. He began buying the stock back in 2006, when Citi shares traded between $44 and $57, and continued his purchases through the first three quarters of last year, when Citi ranged between $44 and $56. During the summer of 2007, before the subprime mortgage crisis hammered stocks across the financial sector, Lampert’s stake was worth as much as $1.3 billion. Given Lampert’s track record, it’s no surprise that his foray into Citi had some observers applauding his prescience.

But Citi shares lost more than a third of their value during the fourth quarter alone, as CEO Chuck Prince departed after Citi admitted it would have to take a multibillion-dollar writedown of mortgage-related securities. The shares fell to just over $29 in December from $45 earlier in the quarter. By year-end, Lampert’s Citi scaled-down holdings were worth just $561 million, filings show - a fraction of their peak worth.

It’s impossible to know whether Lampert has been buying or selling Citi shares this year, but so far 2008 is shaping up as another rough one. Five of his fund’s six holdings at Dec. 31 are down for the year, with Citi down 12 percent, AutoZone (AZO) down 6 percent, AutoNation (AN) down 4 percent, Sears off 3 percent and Home Depot (HD) down 1 percent. Only marketing services firm Acxiom (ACXM), Lampert’s smallest holding at Dec. 31, is up, with a 9 percent gain. Lampert’s showing is in line with the broad stock market declines so far this year, but that surely can’t make his investors any less antsy.

 Sears (SHLD) made a change at the top. The struggling department store chain named the head of its supply chain and operations, Bruce Johnson, interim CEO while the company searches for a full-time leader. Johnson will replace Aylwin Lewis, who had been Sears’ chief for more than three years but who has overseen a sharp decline in the company’s performance. Sears has serially disappointed Wall Street with its profit performance in recent quarters, as shoppers have been put off by the company’s poor merchandise, high prices and dingy stores. Hedge fund manager and Sears chairman Ed Lampert, whose firm owns nearly half of Sears’ shares, has begun shuffling names and titles on his whiteboard without giving any indication that he plans to do what everyone knows Sears needs to do - invest more in the business. “We are entering a new phase in Sears’ evolution as a multi-channel retailer, as reflected by the new operational structure we recently announced,” Lampert said Monday, “and the board has determined that now is the right time to put in place new leadership to take the company forward.” A new CEO probably can’t do any worse than Lewis did, but it’s far from certain that an executive change alone will be enough to pull Sears out of its nosedive.

Sears (SHLD) will finally get to kick the tires at Restoration Hardware (RSTO). Ed Lampert’s struggling retail conglomerate signed a confidentiality agreement that will give Sears a look at the furnishing chain’s books. Restoration Hardware agreed last month to go private in a deal worth $6.70 a share, but Sears indicated just weeks later that it would be willing to pay at least $6.75, up from a previous offer of $4 a share. The period during which Restoration Hardware can solicit competing offers to its $267 million buyout agreement with Catterton Partners is due to expire Thursday, so Restoration Hardware’s fate could soon be clear. In the meantime, investors are still scratching their heads about what Lampert is trying to accomplish at Sears.