Bear Stearns Warns Hedge Fund Investors of Total Loss (Update1)

By Yalman Onaran
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The headquarters of Bear Stearns Cos. in New York

July 17 (Bloomberg) -- Bear Stearns Cos. told investors in one of its hedge funds that they won't get any money back after creditors forced it to sell assets at depressed prices, according to a letter sent by the firm.

While a second fund still contains ``sufficient assets'' to cover the $1.4 billion it owes the New York-based firm, there's ``very little value left for the investors,'' Bear Stearns said in the two-page letter, a copy of which was obtained by Bloomberg News from a person involved in the matter. Bear Stearns bailed out that fund last month with $1.6 billion in emergency funding.

The situation underscores the severity of the shakeout in collateralized debt obligations, securities that the funds used to bet on subprime mortgage loans. Bear Stearns said in the letter that the funds faced ``unprecedented declines'' in bonds that were rated AAA or AA, the two top investment grades.

``That has implications for credit weakness in the next several days and weeks,'' said Peter Plaut, an analyst at New York-based hedge fund Sanno Point Capital Management. ``There's going to be more risk aversion.''

Bear Stearns spokeswoman Elizabeth Ventura declined to comment.

Shares of Bear Stearns have dropped 14 percent this year, sliding further as the crisis in subprime mortgages deepened and the two funds flirted with collapse. The risk of owning corporate bonds issued by Bear Stearns surged today to the highest since November 2002, according to credit default swap traders.

Borrowed Money

The fund that now has nothing left for investors, the High- Grade Structured Credit Strategies Enhanced Leverage Fund, had $638 million of capital as of March 31, according to performance reports sent to clients at the time. The second fund, called the High-Grade Structured Credit Strategies Fund, had $925 million.

Both funds made leveraged bets in an effort to boost returns. The enhanced fund borrowed about $11 billion, or almost 20 times its capital. Its sister fund, the one Bear Stearns bailed out last month, borrowed almost $9 billion.

That second fund has lost about 91 percent of its value this year, according to a person with direct knowledge of its performance who declined to be identified because the figures aren't public.

``During June, the funds experienced significant declines in the value of their assets resulting in a loss of net asset value,'' Bear Stearns said in today's letter. ``In light of these returns, we will seek an orderly wind-down of the funds over time.''