Two Hedge Funds — Out of Funds

Kurt Brouwer July 17th, 2007

The two Bears Stearns hedge funds we wrote about earlier are now reportedly worthless. Kate Kelly and Serena Ng report in Wall Street Journal Online that there will not be much left for investors from these two hedge funds:

‘Weeks after the meltdown of two prominent Bear Stearns Cos. hedge funds that bet heavily on the market for risky home loans, the brokerage has told the funds’ investors that the portfolios’ assets are almost worthless, according to people familiar with the matter.

The assets in Bear’s more-levered fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, are worth virtually nothing, according to people familiar with the matter. The assets in the larger, less-levered fund are worth roughly 9% of the value since the end of April, these people said. The April valuations were not immediately available, but in March, before their sharp losses, the enhanced leverage fund had $638 million in investor money, while the other fund had $925 million…’

No doubt that is quite a shock to the investors, but we have seen many times that investment approaches that make use of borrowed money–that is, leverage–can be quite risky.

There are mutual funds that also invest in subprime loans and similar vehicles, but they did not suffer the devastating losses suffered by these hedge funds, in part because most mutual funds do not borrow money as a routine component of their investment process.

 

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