Bear Says Battered Hedge Funds Worth Little

[Andy Nguyen]

Bear Stearns told clients in its two battered hedge funds late Tuesday that their investments, worth an estimated $1.5 billion at the end of 2006, are almost entirely gone.
The New York Times said that Bear Stearns brokers made phone calls to anxious investors Tuesday to report that May and June had been devastating months for the portfolios.


The more conservative fund, the High-Grade Structured Credit Strategies Fund, was down 91 percent by the end of June, investors were told. The High-Grade Structured Credit Strategies Enhanced Leverage Fund, which used extensive borrowings and assumed more risk, has no investor capital left, the firm said.


"In light of these returns, we will seek an orderly wind-down of the funds over time," a letter to Bear Stearns clients said.


Overseen by Bear Stearns Asset Management, the hedge funds had been stellar performers until this spring when the mortgage securities market began to falter. Delinquencies on loans made to risky borrowers, known as subprime mortgages, started climbing in February; since then the value of the securities have spiraled downward.
Bear Stearns executives declined to comment last night.

 

[Andy Nguyen]

Bad News Bear? It’s All Relative


For a company that just had two big hedge funds evaporate, Bear Stearns seemed to be faring relatively well on Wednesday. Its shares were down 1.1 percent in late-morning trading Wednesday, far less than the after-hours decline of 3.6 percent they registered Tuesday night. That is when reports started emerging that two Bear Stearns-run hedge funds, worth an estimated $1.5 billion at the end of 2006, has lost nearly all their value because of mortgage-related bets gone bad.
Why wasn’t the share reaction bigger?
Perhaps investors were taking the glass-half-full view expressed by Felix Salmon on the Portfolio.com blog. Mr. Salmon noted that, considering how leveraged these hedge funds were — they funded their positions with multibillion-dollar loans from major Wall Street banks — it is a wonder that the funds didn’t end up deeply, deeply in the red when the smoke cleared.
He wrote:

As it is, investors in the funds will have lost their money. But the banks which lent money to the funds will get it all back, and neither Barclays nor anybody else is going to have to suffer hundreds of millions of dollars in loan losses.
​

Of course, someone was feeling the pain Wednesday — it just might not have been Bear Stearns. That was the idea behind a post on Greg Newton’s Naked Shorts blog. Mr. Newton provided this four-word summary of Bear’s latest letter to its hedge-fund investors: “You’re screwed. We’re not.”
Mr. Salmon said Bear’s final tally is much better than Wall Street had expected, but others would disagree. “How did you go from reporting very high returns to suddenly now saying the collateral is worth nothing?” Janet Tavakoli, president of Tavakoli Structured Finance, asked The New York Times in an article published Wednesday.
The damage to Bear Stearns from Tuesday’s disclosure may be as much with the firm’s reputation as with its earnings or stock price. Along those lines, the firm closed its letter to the funds’ investors this way:
“Our highest priority is to continue to earn your trust and confidence each and every day, consistent with the firm’s proud history of achievement. As always, please contact us if we can be of service.”