Update: Bear Stearns Tells Investors Subprime Hedge Funds are ‘Almost Worthless’

Updating an earlier post, it looks like those in the financial markets had good reason to brace themselves for bad news — but I doubt even those braced for the worst were expecting to see a near complete collapse of the two Bear Stearns funds I’ve been blogging incessantly about during the past month.

Talk about “repricing” - the Wall Street Journal reports:

Weeks after the meltdown of two prominent Bear Stearns Cos. hedge funds that bet heavily on the market for risky home loans, the brokerage has told the funds’ investors that the portfolios’ assets are almost worthless, according to people familiar with the matter.

The assets in Bear’s more-levered fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, are worth virtually nothing, according to people familiar with the matter. The assets in the larger, less-levered fund are worth roughly 9% of the value since the end of April, these people said.

The Street also has a story on this, and shows just how surprised investors likely were over the news:

Sources say investors had been expecting a recovery of around 50 cents on the dollar for the less leveraged fund. Bear shares fell almost 3% in after-hours trading …

In this opaque market where valuation is based on models and trading is over-the-counter, not via transparent pricing systems like stocks or cash bonds, the implications of Bear’s new information is hard to determine. But “any new information on price discovery is valuable,” says Chris Vincent, head of fixed income at William Blair & Co.

Reuters obtained a copy of the letter provided to investors today:

“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,” according to the letter. A copy of the letter was obtained by Reuters …

“The losses reflected “unprecedented declines in the valuations of a number of highly-rated (AA and AAA) securities,” the letter said.

Update: The WSJ is providing a copy of the investor letter on its Web site.