Life in the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage fund – as chronicled in the bank’s monthly performance update to investors.
Feb 28, 2007: DOWN 0.08 per cent. Strategy: Blame the press
February was a volatile month in the structured credit markets, particularly in any credit associated with sub-prime mortgages….The mass media carried many stories about potential disasters in the sub-prime market. The result of this was a rapid and severe widening in the sub-prime credit derivatives index which in turn led to a broad based widening of mortgage-backed assets up and down the capital structure.
While the Fund was well positioned for this spread widening with its ABX hedges put in place over the second half of 2006 the Fund was also a net purchaser of CDO assets in the latter part of 2006 and January 2007. These asset purchases were concentrated in CDOs with exposure to sub-prime collateral. Hedges accounted for a positive 13.5% gain with asset mark to market losses of 14.4% and carry of approximately 0.8%.
March 31, 2007: DOWN 5.41 per cent. Strategy: Blame the market
Performance suffered in March for two reasons: first, continued weakness in CDOs with exposure to sub-prime collateral caused additional mark downs in our long asset exposure; second, our short positions rose in price as many investors who were short the sub-prime credit default index covered their positions…..The widening in spreads we experienced in February and March was the result of fear of an unprecedented increase in the cumulative losses these portfolios will suffer over time, not of an actual deterioration in credit on the underlying bonds in our portfolio.
The price action on the short side of our portfolio was driven by technicals rather than credit fundamentals as many macro short sellers covered positions in March to lock in profits. Thus, while the actual credit environment continued to deteriorate, the credit derivative indices rose with the short covering. Our short positions are based upon credit fundamentals…..Our losses in March are frustrating.
April 2007: MELTDOWN!
June 30, 2007, as released by Bear on Tuesday:
The preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage fund and very little value left for the investors in the High-Grade Fund as of June 30, 2007. In the light of these returns, we will seek an orderly wind-down of the Funds over time.
Dear, oh, dear.