Bear Stearns Shutters Asset-Backed Hedge Fund After 39% Loss

Bear Stearns Shutters Asset-Backed Hedge Fund After 39% Loss

Jan. 9 (Bloomberg) -- Bear Stearns Cos. is closing a hedge fund that invested in asset-backed securities after it plummeted at least 39 percent last year, losing more than $300 million between August and the end of November.

The fund, which held about $900 million of investments backed by home mortgages and other assets in August, dropped 21.4 percent in November alone, the New York-based company told investors in a Dec. 20 letter obtained by Bloomberg News.

Bear Stearns, the fifth-largest U.S. securities firm, said it would return $90 million in cash to investors immediately. The fund's remaining assets, which the company values at about $500 million, will be sold and the proceeds refunded over an unspecified period of time, according to the letter. Bear Stearns spokeswoman Jane Slater confirmed the letter's contents.

``Based on continued market deterioration, we believe that a furtherance of the strategy, even under a longer lock-up, would not be in the best interests of investors,'' Bear Stearns said in the letter. The fund's 39 percent decline last year through November could be revised ``given the difficult market conditions that continue to exist,'' according to the letter.

The closure adds to the list of hedge fund casualties at Bear Stearns, which shut down two others in July as the value of their mortgage-backed securities sank. The failure of those funds helped trigger the collapse of the subprime mortgage market, as investors stopped buying securities linked to the home loans to borrowers with poor credit histories.

`Fully Paid'

The asset-backed securities fund Bear Stearns opted to close down last month had less than 0.5 percent of its investments in securities linked to subprime loans, the firm said in August. Bear Stearns sought to restructure the fund last year in a way that would have barred investor withdrawals for two years. Faced with mounting losses, it abandoned that reorganization, according to the Dec. 20 letter.

``The fund is unleveraged and has fully paid for all of the securities it owns, so we believe we are well situated to sell assets and further distribute cash to investors in a reasonable time frame,'' Slater, the Bear Stearns spokeswoman, said today.

Bear Stearns told investors in August that it would keep the fund open after blocking withdrawals.

James ``Jimmy'' Cayne, 73, stepped down as the securities firm's chief executive officer yesterday and was replaced by Alan Schwartz, 57. Bear Stearns has lost about 55 percent in New York trading in the past 12 months.

BLOOMBERG