Bear Stearns Cos. Inc.'s (BS) two troubled hedge funds that bet heavily on risky subprime loans now have "very little value," the company said in a letter sent to investors on Tuesday.

Bear Stearns in June had said it would provide up to $3.2 billion in financing for its High-Grade Structured Credit Strategies Fund. The investment bank had also said its Enhanced Leverage Fund had taken greater risk in investments backed by subprime mortgages.

"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.

Separately, a source familiar with the funds said the net asset value for the High-Grade Structured Credit Strategies Fund is about 9 cents on the dollar.

Bear Stearns Asset Management said it "will seek an orderly wind-down of the funds over time," the letter stated. "This is a difficult development for investors in these funds and it is certainly uncharacteristic of BSAM's overall strong record of performance."

Bear said significant declines in June forced the latest action.

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

Company spokesman Russell Sherman declined to comment.

The Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage fund reported $638 million of investor capital and gross long positions of $11.15 billion in the first quarter.

The Bear Stearns High-Grade Structured Credit Strategies fund had $925 million of investor capital and gross long positions of $9.682 billion through March 31.

Bear Stearns was forced last month to bail out that fund with $1.6 billion, reduced from $3.2 billion initially, to prevent a fire sale of those assets.

Currently, about $1.4 billion remains outstanding on this credit line, Bear said in the letter.

The collapse of the funds roiled financial markets and has sent a benchmark index of subprime mortgage bonds to record lows, reflecting concern that the worst is not yet over for the $7 trillion market for mortgage-related bonds.

In after-hour trading on Tuesday, U.S. short-term interest rates were modestly higher, while stock futures were down with the September S&P 500 contract off 8 points from its regular close.

"So far we haven't seen that they have posed a systemic risk, though a lot could be hidden underneath the surface, said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco.

At the end of June, Bear Stearns made management changes in an attempt to restore investors confidence. Jeff Lane, a veteran money manager and vice chairman at Lehman Brothers, was appointed chairman and chief executive at BSAM.

Tom Marano, head of Bear Stearns' mortgage department, also was tapped to unwind the funds.

The risk management function at BSAM has been restructured so that managers will now report to Mike Alix, Bear Stearns' chief risk officer, to create an additional layer of oversight.

Mike Winchell, former head of risk management for Bear Stearns and most recently with Bear Wagner, also is a consultant, the letter said.