Bear Stearns Fund Hurt
By Subprime Loans

Hard hit by turmoil in the market for risky mortgages, a big Bear Stearns Cos. hedge fund has fallen 23% from the start of the year through late April, according to people familiar with the matter.

The performance was disclosed late last week in a letter to investors from executives at the Wall Street firm's asset-management division, these people say. The fund, called the High-Grade Structured Credit Strategies Enhanced Leverage Fund, is widely exposed to subprime mortgages, or home loans to borrowers with weak credit histories, these people add. It has $600 million under management, but as the fund's name suggests, it borrows heavily to make bigger bets. A spokeswoman for Bear Stearns wouldn't comment on the fund's performance.

While the fund is down significantly, it is hard to tell what the actual losses will be because a few good trades could bring it back into the clear. Still, given the fund's heavy exposure to this deteriorating corner of the mortgage market, in which many people are struggling to pay down their home loans, the news isn't good. Recently, the fund prevented some investors from pulling their cash.

Limited Impact on Bear

While the year-to-date performance of the leveraged fund is a blow for its managers, Ralph Cioffi and Matthew Tannin, the paper losses will have a limited impact on Bear, two people close to the situation say.

The brokerage and a group of individual executives have invested about $40 million in the fund, according to someone familiar with the matter.

The majority of the $600 million under management comes from outside investors such as hedge funds and wealthy individuals.

Trouble for Everquest IPO

Some market participants predict the fund's downturn could have a chilling effect on Bear's planned initial public offering of Everquest Financial Ltd., a holding company that contains risky assets from some Bear Stearns hedge funds, including the one with recent losses. Everquest is run, in part, by Mr. Cioffi.

Everquest was formed last fall when two credit hedge funds transferred some of their riskiest assets into the new entity.

In return, the funds received a majority stake in Everquest, which was valued at $400 million, plus nearly $149 million in cash, according to regulatory filings submitted to the Securities and Exchange Commission last month.

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