Bear Stearns to hedge fund investors: Ha Ha!

Bear Stearns raised money from investors to leverage up and invest in subprime loans. Brilliant! Now with the fund down 23% (and getting worse), Bear won't let investors cash out. Worse, Bear won't answer their questions:

Investors in a 10-month-old Bear Stearns hedge fund are learning the hard way the danger of investing in risky bonds with borrowed money. The investment firm's High-Grade Structured Credit Strategies Enhanced Leverage Fund, as of Apr. 30, was down a whopping 23% for the year.

The situation is so bleak that Bear Stearns' asset management group is suspending redemptions at the onetime $642 million fund—meaning investors have no choice but to sit on their losses. And that's got some hopping mad.

"At the end of the day, I'd like someone to be honest with me about what's going on," says one investor in the hedge fund, which bet heavily on bonds backed by subprime mortgages, or home loans to consumers with shaky credit histories. An investor in Europe, who didn't want to be identified, says he's been trying to get his money out of the hedge fund since February.

He's particularly incensed that on a June 8 conference call the fund's managers set up to discuss performance, Bear Stearns officials refused to field investors' questions. "They specifically said they weren't taking any questions," says the investor. "They didn't want to say anything."

Let this be a lesson to them. Investors in hedge funds are, by and large, idiots. Most hedge funds chase returns by using way too much leverage buying risky assets. Worse, the thousands of hedge funds out there pursue a lot of the same strategies. When a trade goes the wrong way with tons of leverage and many funds leaning the same way, it can be a bloodbath as everybody runs for the exits.

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