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Bear Stearns Hedge Funds in Flux

Two Bear Stearns (BSC) leveraged hedge funds appear to be losing their battle to stay afloat.

The investment vehicles, known as the High Grade Structured Credit Strategies Enhanced Leveraged Fund and the High Grade Structured Credit Strategies Fund, have been struggling to stay afloat over the past several days. But reports Wednesday say they could be shutting down after a major creditor has decided to unload assets and collateral tied to the funds' mortgage investments.

Creditor Merrill Lynch (MER) seized the funds' collateral late last Friday. It reconsidered a plan to shop the assets on Monday in order to hear out Bear Stearns' last-ditch effort to keep the funds running and pay off its lenders.

But according to recent reports, Bear's recovery plan -- which would have seen creditors pump in an additional $1.5 billion in cash -- came with too many conditions. One that may have broken the deal was a provision that creditors call off margin calls and provide another $500 million, according to published reports.

The funds were kicked off last August and run by Ralph Cioffi. The hedge funds focused on making bets on securities tied to risky mortgages given to borrowers with poor credit. About $2 billion worth of assets could be liquidated in the Bear vehicles, news reports said.

Observers fear that the dissolution of the Bear funds could spell bad news for other hedge funds and managers of so-called collateralized debt obligations -- pools of debt including leveraged loans and mortgages -- because it may force a broad repricing in those largely illiquid mortgage securities.

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