Bear Stearns Cos. Inc., recently embarrassed by the collapse of two hedge funds, said on Tuesday it has halted redemptions in a third hedge fund after jittery investors wanted to pull out their money.

Bear Stearns' (BSC) $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.

The downturn at the third Bear Stearns hedge fund likely will jolt investors already jittery about the U.S. housing slump reaching deeper into the American economy. Shares of American Home Mortgage Investment Corp. (AHM) plunged 90 percent on Tuesday after the lender said it might liquidate.

The news at Bear Stearns follows the spectacular flameout this week at Sowood Capital, a hedge fund that managed money for Harvard University and lost roughly half of its $3 billion in capital in less than a month.

Analysts say more hedge fund collapses could follow, especially at ones that don't have enough capital to ride out tumultuous mortgage and credit markets.

Problems with subprime mortgages, or loans to people with weak credit are well known. But now, loans to people judged by banks to have better credit are having problems, too.

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.

Earlier this month, JPMorgan Chase & Co. (JPM), the third-largest U.S. bank, said it tripled the amount of money set aside for loan losses as even borrowers with good credit defaulted on home equity loans. Countrywide Financial Corp. (CFC.N: Quote, Profile, Research), the nation's largest mortgage lender, reported similar problems on prime home equity loans.

Australia's Macquarie Bank (MBL) warned that individual investors face losses of up to 25 percent in two of its investment funds, blaming fall-out from the U.S. subprime mortgage crisis.

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."