Reversing course, Bear Stearns has told investors that it is shuttering an asset-backed securities hedge fund that lost almost 40% of its value last year. The firm, which was forced by the subprime mortgage collapse to close two funds in the summer, had unveiled a plan to save the fund in August, suspending investor redemptions.

The once-$900 million Bear Stearns Asset Backed Securities Fund lost 21.4% in November, and dropped by one-third between August and November. All told, it fell by at least 39% last year. Bear blamed the ongoing credit crisis for its decision, noting that “given the difficult market conditions that continue to exist,” things could get worse.

“Based on continued market deterioration, we believe that a furtherance of the strategy, even under a long lock-up, would not be in the best interests of investors,” Bear told clients in a letter on Dec. 20, Bloomberg News reports.

Bear said the fund still has about $500 million in assets, and would return $90 million immediately, with the rest refunded as its assets are sold. The firm did not give a timetable for the fund’s unwinding, but did say that it is completely unlevered and had just 0.5% exposure to subprime-linked securities. Portfolio manager Colin Gordon will remain on until the fund closes.

Under Bear’s original plan, the fund would have been restructured, locking up investor cash for two years.