Investors in two Bear Stearns hedge funds are having a bad day as the investment bank reported the funds are now worth nearly nothing following investments in subprime mortgages.
Bear Stearns reported to investors that the High-Grade Structured Credit Enhanced Leveraged Fund and the High-Grade Structured Credit Fund are both now nearly worthless.
The funds were heavily invested in subprime mortgages. The subprime industry virtually collapsed earlier this year as interest rates rose and home prices fell.
Subprime mortgages are loans made to high-risk borrowers.
The funds were managed by Bear Stearns Asset Management, which notified investors in a letter yesterday that the more conservative fund, the High-Grade Structured Credit Strategies Fund, was down 91 percent by the end of June and the High-Grade Structured Credit Strategies Enhanced Leverage Fund had lost all of its investor capital.
The funds were once valued as high as $16 billion.
While news that the Bear Stearns funds were in trouble has been around for the past few weeks, the announcement caused more jitters for companies that invested in the subprime market.
Bear Stearns halted redemptions of the fund ins May after estimates of the losses began to climb and investors scrambled to get out. In June, Bear Stearns offered a $1.5 billion loan to fortify the more conservative fund as other lenders began asking for more cash as collateral.