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Bear Stearns, recently embarrassed by the collapse of two hedge funds, said on Tuesday it has halted redemptions in a third hedge fund after jittery investors wanted to pull out their money. 
Bear Stearns' [BSC
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] $850 million Asset-Backed Securities Fund experienced declines in July, prompting some investors to seek redemption of their investments. The investment bank, however, believes the assets in the fund -- tied to Alt-A and prime mortgages -- are worth more than what current market conditions will allow.
The downturn at the Bear Stearns hedge fund likely will jolt investors already jittery about the U.S. housing slump reaching deeper into the American economy. Shares of American Home Mortgage Investment [AHM
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] plunged 90% on Tuesday after the lender said it might liquidate.
Problems with subprime mortgages, or loans to people with weak credit are well known. But now, loans to people judged by banks to have better credit are having problems, too.
Through the end of June, the Bear Stearns hedge fund was up about 5%, but then soured in July. The company declined to be more specific.
Earlier this month, JPMorgan Chase [JPM
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], the third-largest U.S. bank, said it tripled the amount of money set aside for loan losses as even borrowers with good credit defaulted on home equity loans. Countrywide Financial [CFC
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], the nation's largest mortgage lender, reported similar problems on prime home equity loans.
Unlike the two funds that collapsed, the third Bear Stearns hedge fund is not leveraged and has cash on hand. The fund also has less than 1% of its assets tied to subprime loans, according to a person familiar with the fund's holdings.
"We believe the fund portfolio is well positioned to wait out market uncertainty and we believe by suspending redemption we can ensure the best long term results for our investors," Bear Stearns spokesman Russell Sherman said. "We don't believe it is in the best interests of our investors to sell assets in this current market environment."
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