Another Bear Stearns hedge fund is apparently in trouble. But this one isn’t heavily invested in subprime. And it isn’t leveraged, either. Reuters reports:

Bear Stearns’ $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 … Through the end of June, the Bear Stearns hedge fund was up about 5 percent, but then soured in July. The company declined to be more specific … 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 percent 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.”

As HW readers know well, two other Bear Stearns hedge funds — both subprime heavy, both heavily leveraged — ran aground recently amid a worsening mortgage crisis. A Bloomberg story on this gives more detail, with Bear Stearns spokesperson saying the fund halted redemptions because it wants to protect investor’s dollars rather than selling fund assets at a trough — and it can afford to play the waiting game because the fund isn’t leveraged, as was the case with previous funds. With underlying asset performance now widely expected to get even worse over (at least) the next two quarters — and given the recent track record of the subprime credit sector — it seems reasonable to me to at least question the logic that says the mortgage securities in question here will eventually rebound in value. Where, exactly, is this future value expected to come from? We’re talking structured securities here — whatever the particular flavor of derivative — which means that poor asset performance soaks up excess interest, eats away at overcollateralization, and eventually flattens subordination structures. The valuation exercise here isn’t really a plastic one, as a result. The underlying assets (mortgages) aren’t fungible, for one, and they have the nasty characteristic of possessing a limited time horizon at best. Regardless of the complexity of the derivative security, the old adage that ‘the leaf doesn’t fall far from the tree’ applies to secondary markets just as it does to human genetics — which is another way of saying that underlying asset performance matters much more than some might realize. (Or want to admit.)