The Wall Street Journal is reporting that a troubled Bear Stearns’ hedge fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, has received an extra day from investors to secure “bailout” funding (subscription req’d) intended to keep the fund afloat and prevent it from falling victim to margin calls. The highly-leveraged fund in question invested heavily in the subprime bond market — only $600 million of the fund represents Bear Stearns financial interests, while more than $6 billion was provided by various other Wall Street firms, including Merrill Lynch. The Journal reports that, among other courses of action, Bear is proposing to capitalize the fund with $1.5 billion in new loans, which of course would substantially increase its own exposure to the troubled fund — ostensibly dragging down future earnings in the process. But here’s where the story gets really twisted for me:

The fund used a big chunk of capital to bet the subprime market would fall, said a person with knowledge of the fund’s workings, and was performing well until a popular index used to track subprime-backed securities began to rise in March.

Say what? Isn’t Bear Stearns in the middle of a fight with John Paulson, who is alleging that the company engaged in a loan modification strategy designed largely to prop up CDO trading values? The WSJ suggests here, however, that investor losses on the High-Grade Structured Credit Strategies Enhanced Leverage Fund were due to the ABX staying afloat — the very thing that has Paulson slinging arrows at the investment bank. Color me confused. Is Bear Stearns long or short on the subprime market? Or, more likely, hopelessly hedged in both directions?