nvq
 

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY
Investment Company Act file number 811-21102
The Hyperion Strategic Mortgage Income Fund, Inc.
(Exact name of registrant as specified in charter)
Three World Financial Center, 200 Vesey Street, 10th Floor, New York, NY 10281-1010
(Address of principal executive offices) (Zip code)
Thomas F. Doodian, Three World Financial Center, 200 Vesey Street, New York, NY 10281-1010
(Name and address of agent for service)
Registrant’s telephone number, including area code: 212-549-8400
Date of fiscal year end: November 30, 2006
Date of reporting period: August 31, 2006
Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (Sections 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. Section 3507.
 
 

 

 

Item 1. Schedule of Investments
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments (Unaudited)
August 31, 2006
                                 
                    Principal        
    Interest             Amount     Value  
    Rate     Maturity     (000s)     (Note 2)  
 
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 72.3%
                                
U.S. Government Agency Pass-Through Certificates - 54.3%
                                
Federal Home Loan Mortgage Corporation
                                
Pool A14559
     6.50 %     09/01/33     $ 1,803     $ 1,835,905  
Pool C68878
     7.00       06/01/32       424       436,521  
Pool C69047
     7.00       06/01/32       989       1,017,670  
Pool G01466
     9.50       12/01/22       1,110       1,205,094  
Pool 555559
     10.00       03/01/21       1,187       1,314,770  
 
                              
 
                             5,809,960  
 
                              
Federal National Mortgage Association
                                
TBA
     5.50       07/01/33       5,000       4,903,125  
TBA
     6.00       07/01/26       5,000       5,000,000  
Pool 694391
     5.50       03/01/33       3,348       3,296,012  
Pool 753914
     5.50       12/01/33       7,667 @     7,548,927  
Pool 754355
     6.00       12/01/33       3,731       3,743,912  
Pool 761836
     6.00       06/01/33       3,015       3,027,295  
Pool 763643
     6.00       01/01/34       6,727 @     6,745,098  
Pool 255413
     6.50       10/01/34       7,439 @     7,558,967  
Pool 323982
     6.50       10/01/06       35       34,973  
Pool 795367
     6.50       09/01/34       3,175       3,226,102  
Pool 809989
     6.50       03/01/35       3,335       3,386,234  
Pool 626299
     7.00       06/01/32       357       366,904  
Pool 635095
     7.00       06/01/32       767       789,105  
Pool 641575
     7.00       04/01/32       231       237,760  
Pool 645399
     7.00       05/01/32       2,164       2,225,596  
Pool 645466
     7.00       05/01/32       2,376       2,444,045  
Pool 650131
     7.00       07/01/32       1,370       1,409,684  
Pool 819251
     7.50       05/01/35       3,194       3,299,528  
Pool 887431
     7.50       08/01/36       2,080 @     2,143,996  
Pool 398800
     8.00       06/01/12       556       575,445  
Pool 827854
     8.00       10/01/29       2,211       2,346,270  
Pool 636449
     8.50       04/01/32       1,875       2,017,989  
Pool 823757
     8.50       10/01/29       3,121       3,357,794  
Pool 458132
     9.45       03/15/31       1,527       1,673,477  
 
                              
 
                             71,358,238  
 
                              
Total U.S. Government Agency Pass-Through Certificates
(Cost — $78,702,770)
                             77,168,198  
 
                              
U.S. Treasury Obligations - 18.0%
                                
United States Treasury Notes (Cost — $25,706,749)
     4.50       02/15/16       26,100 @     25,613,679  
 
                              
Total U.S. Government & Agency Obligations (Cost — $104,409,519)
                             102,781,877  
 
                              
ASSET-BACKED SECURITIES - 14.8%
                                
Housing Related Asset-Backed Securities - 13.2%
                                
Asset Backed Funding Certificates
                                
Series 2005-AQ1, Class B1* (b)
     5.75       06/25/35       993       846,841  
Series 2005-AQ1, Class B2* (b)
     5.75       06/25/35       1,050       882,817  
 
                              
 
                             1,729,658  
 
                              
First Franklin Mortgage Loan Asset Backed Certificates
                                
Series 2004-FF8, Class B4* (a)
     8.82 †     10/25/34       1,250       1,204,819  
Series 2004-FFH2C, Class B1* (a)
     8.82 †     06/25/34       1,250       1,218,037  
 
                              
 
                             2,422,856  
 
                              
Green Tree Financial Corp.
                                
Series 1997-3, Class M1
     7.53       03/15/28       2,000       1,440,000  
Series 1995-6, Class M1
     8.10       09/15/26       4,325       4,521,268  
 
                              
 
                             5,961,268  
 
                              

1

 

THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments (Unaudited)
August 31, 2006
                                 
                    Principal        
    Interest             Amount     Value  
    Rate     Maturity     (000s)     (Note 2)  
 
ASSET-BACKED SECURITIES (continued)
                                
Mid-State Trust
                                
Series 2004-1, Class M2
     8.11 %     08/15/37     $ 1,404     $ 1,471,991  
Option One Mortgage Loan Trust
                                
Series 2006-1, Class M7
     6.47 †     01/25/36       3,000       3,014,199  
Structured Asset Investment Loan Trust
                                
Series 2004-11, Class M9(b)
     5.00       01/25/35       1,900       1,799,621  
Series 2004-4, Class B* (b)
     5.00       04/25/34       1,500       1,368,150  
Series 2004-8, Class B1(a)
     7.82 †     09/25/34       1,000       965,260  
 
                              
 
                             4,133,031  
 
                              
Total Housing Related Asset-Backed Securities (Cost — $18,744,306)
                             18,733,003  
 
                              
Non-Housing Related Asset-Backed Securities - 1.6%
                                
Airplanes Pass Through Trust
                                
Series 1R, Class A8
                                
(Cost — $1,991,944)
     5.71 †     03/15/19       2,404       2,307,907  
 
                              
Total ASSET-BACKED SECURITIES (Cost — $20,736,250)
                             21,040,910  
 
                              
COMMERCIAL MORTGAGE BACKED SECURITIES - 23.1%
                                
Banc America Comercial Mortgage, Inc.
                                
Series 2006-1, Class J*
     5.78       09/10/45       1,000       957,610  
Bear Stearns Commercial Mortgage Securities
                                
Series 2006-PWR11, Class H*
     5.63       03/11/39       1,100       1,040,336  
Series 1999-C1, Class D
     6.53       02/14/31       2,500       2,647,125  
Series 2000-WF1, Class E
     8.14 †     02/15/32       2,000       2,159,080  
 
                              
 
                             5,846,541  
 
                              
CD 2006 CD2
                                
Series 2006-CD2, Class J*
     5.47       01/11/46       1,000       942,847  
Credit Suisse Mortgage Capital Certificates
                                
Series 2006-C1, Class K*
     5.74 †     02/15/39       2,358       2,236,995  
GE Capital Commercial Mortgage Corp.
                                
Series 2002-2A, Class G*
     6.04       08/11/36       3,000       3,085,410  
Series 2000-1, Class G*
     6.13       01/15/33       1,000       587,100  
Series 2002-2A, Class H*
     6.31       08/11/36       2,000       2,081,618  
 
                              
 
                             5,754,128  
 
                              
GMAC Comericial Mortgage Securities, Inc.
                                
Series 2006-C1, Class G*
     5.61       01/24/45       2,500       2,426,717  
JP Morgan Chase Commercial Mortgage Securities
                                
Series 2003-LN1, Class G*
     5.61 †     10/15/37       1,600       1,568,125  
Series 2006-CIBC14, Class H*
     5.72 †     12/12/44       1,211       1,150,171  
 
                              
 
                             2,718,296  
 
                              
Morgan Stanley Capital I
                                
Series 2004-HQ4, Class G*
     5.53       04/14/40       1,000       970,276  
Series 1999-FNV1, Class E
     7.69 †     03/15/31       2,000       2,100,632  
 
                              
 
                             3,070,908  
 
                              
Nationslink Funding Corp.
                                
Series 1998-2, Class E
     7.11       08/20/30       4,000       4,172,284  
UBS 400 Atlantic Street Mortgage Trust
                                
Series 2002-C1A, Class B3*
     7.19       01/11/22       2,000       2,097,800  
Wachovia Bank Commercial Mortgage Trust
                                
Series 2005-C16, Class H*
     5.48 †     10/15/41       2,000       1,904,118  
Series 2004-WL4A, Class H*
     6.18 †     10/15/15       700       700,005  
 
                              
 
                             2,604,123  
 
                              
Total Commercial Mortgage Backed Securities (Cost — $32,741,120)
                             32,828,249  
 
                              

2

 

THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments (Unaudited)
August 31, 2006
                                 
                    Principal        
    Interest             Amount     Value  
    Rate     Maturity     (000s)     (Note 2)  
 
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES - 28.8%
                                
Subordinated Collateralized Mortgage Obligations - 28.8%
                                
Banc of America Funding Corp.
                                
Series 2005-2, Class B4
     5.66 %†     04/25/35     $ 865     $ 711,671  
Series 2005-2, Class B5
     5.66 †     04/25/35       693       438,529  
Series 2005-2, Class B6
     5.66 †     04/25/35       520       170,441  
 
                              
 
                             1,320,641  
 
                              
Bank of America Alternative Loan Trust
                                
Series 2004-3, Class 30B4*
     5.50       04/25/34       986       801,576  
Series 2004-3, Class 30B5
     5.50       04/25/34       690       431,183  
 
                              
 
                             1,232,759  
 
                              
Bank of America Mortgage Securities, Inc.
                                
Series 2004-A, Class B4
     3.91 †     02/25/34       2,013       1,902,909  
Series 2003-10, Class 1B4
     5.50       01/25/34       552       491,238  
Series 2002-10, Class 1B3
     6.00       11/25/32       1,425       1,419,403  
 
                              
 
                             3,813,550  
 
                              
Cendant Mortgage Corp.
                                
Series 2002-4, Class B1
     6.50       07/25/32       2,554       2,542,580  
Series 2002-4, Class B2
     6.50       07/25/32       1,022       1,017,032  
Series 2002-4, Class B3
     6.50       07/25/32       596       602,764  
Series 2002-4, Class B4
     6.50       07/25/32       341       340,472  
Series 2002-4, Class B5
     6.50       07/25/32       255       235,854  
Series 2002-4, Class B6*
     6.50       07/25/32       341       272,425  
 
                              
 
                             5,011,127  
 
                              
First Horizon Alternative Mortgage Securities
                                
Series 2005-AA6, Class B4
     5.46 †     08/25/35       848       706,474  
Series 2005-AA6, Class B5
     5.46 †     08/25/35       798       538,969  
Series 2005-AA6, Class B6
     5.46 †     08/25/35       499       124,728  
 
                              
 
                             1,370,171  
 
                              
First Horizon Mortgage Pass-Through Trust
                                
Series 2005-4, Class B4*
     5.45 †     07/25/35       421       350,238  
Series 2005-5, Class B4*
     5.46 †     10/25/35       720       597,261  
Series 2005-5, Class B5*
     5.46 †     10/25/35       540       345,428  
Series 2005-5, Class B6*
     5.46 †     10/25/35       541       159,705  
Series 2005-3, Class B4
     5.50       06/25/35       452       376,197  
 
                              
 
                             1,828,829  
 
                              
G3 Mortgage Reinsurance Ltd.
                                
Series 1, Class E*
     25.39 †     05/25/08       4,134       4,443,074  
Harborview Mortgage Loan Trust
                                
Series 2005-14, Class B4*
     5.55 †     12/19/35       394       333,536  
Series 2005-2, Class B4* (a)
     6.11 †     05/19/35       1,488       1,345,261  
Series 2005-1, Class B4* (a)
     7.08 †     03/19/35       629       568,153  
Series 2005-1, Class B5* (a)
     7.08 †     03/19/35       914       722,021  
Series 2005-1, Class B6* (a)
     7.08 †     03/19/35       1,144       285,922  
 
                              
 
                             3,254,893  
 
                              
JP Morgan Mortgage Trust
                                
Series 2003-A1, Class B4
     4.48 †     10/25/33       534       472,955  
Residential Finance Limited Partnership
                                
Series 2002-A, Class B7
     11.07 †     10/10/34       1,888       1,897,862  
Residential Funding Mortgage Securities I, Inc.
                                
Series 2004-S1, Class B2
     5.25       02/25/34       446       298,320  
Series 2003-S7, Class B2
     5.50       05/25/33       520       208,181  
Series 2003-S7, Class B3
     5.50       05/25/33       316       213,762  
Series 2006-SA1, Class B2*
     5.67       02/25/36       824       627,601  
Series 2006-SA1, Class B3*
     5.67       02/25/36       687       250,630  
 
                              
 
                             1,598,494  
 
                              

3

 

THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments (Unaudited)
August 31, 2006
                                 
                    Principal        
    Interest             Amount     Value  
    Rate     Maturity     (000s)     (Note 2)  
 
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES (continued)
                                
Resix Finance Limited Credit-Linked Note
                                
Series 2005-C, Class B7*
     8.47 %†     09/10/37     $ 1,975     $ 1,967,648  
Series 2004-C, Class B7*
     8.87 †     09/10/36       973       981,184  
Series 2004-B, Class B8*
     10.12 †     02/10/36       788       798,305  
Series 2003-CB1, Class B8*
     12.12 †     06/10/35       947       964,999  
Series 2004-B, Class B9*
     13.62 †     02/10/36       1,207       1,240,696  
Series 2004-A, Class B10*
     16.87 †     02/10/36       482       494,504  
 
                              
 
                             6,447,336  
 
                              
Structured Asset Mortgage Investments, Inc.
                                
Series 2002-AR1, Class B4
     6.45 †     03/25/32       391       385,646  
Structured Asset Securities Corporation
                                
Series 2005-6, Class B6
     5.34 †     05/25/35       492       308,341  
Series 2005-6, Class B5
     5.34 †     05/25/35       492       391,880  
Series 2005-6, Class B7
     5.34 †     05/25/35       344       103,223  
 
                              
 
                             803,444  
 
                              
Washington Mutual Mortgage Securities Corp.
                                
Series 2002-AR12, Class B4
     4.66 †     10/25/32       781       768,982  
Series 2002-AR12, Class B5
     4.66 †     10/25/32       586       578,337  
Series 2002-AR12, Class B6
     4.66 †     10/25/32       977       762,417  
Series 2002-AR10, Class B4*
     4.94 †     10/25/32       750       734,797  
Series 2002-AR10, Class B5*
     4.94 †     10/25/32       562       540,405  
Series 2002-AR10, Class B6*
     4.94 †     10/25/32       938       797,229  
Series 2002-AR11, Class B5
     5.11 †     10/25/32       464       455,616  
Series 2002-AR11, Class B6
     5.11 †     10/25/32       623       532,765  
Series 2005-AR2, Class B10(a)
     6.31 †     01/25/45       1,789       1,587,349  
 
                              
 
                             6,757,897  
 
                              
Wells Fargo Mortgage Backed Securities Trust
                                
Series 2002, Class B5
     6.00       06/25/32       355       348,586  
 
                              
Total Subordinated Collateralized Mortgage Obligations
(Cost — $40,105,458)
                             40,987,264  
 
                              
Total Non-Agency Residential Mortgage Backed Securities
(Cost — $40,105,458)
                             40,987,264  
 
                              
SHORT TERM INVESTMENTS - 0.7%
                                
Federal Farm Credit Discount Note
     0.00       09/05/06       1,000       999,434  
United States Treasury Bill
     0.00       09/14/06       50 #     49,911  
 
                              
Total Short Term Investments (Cost — $1,049,349)
                             1,049,345  
 
                              
Total Investments - 139.7% (Cost — $199,041,696)
                             198,687,645  
Liabilities in Excess of Other Assets — (39.7)%
                             (56,513,968 )
 
                              
NET ASSETS - 100.0%
                           $ 142,173,677  
 
                              
 
         
@
  —   Portion or entire principal amount delivered as collateral for reverse repurchase agreements.
†
  —   Variable Rate Security: Interest rate is in effect as of August 31, 2006.
*
  —   Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may only be resold in transactions exempt from registration, normally to qualified institutional buyers.
(a)
  —   Security is a “step up” bond where coupon increases or steps up at a predetermined date. At that date these coupons increase to LIBOR plus a predetermined margin.
(b)
  —   Security is a “step up” bond where coupon increases or steps up at a predetermined date. Rates shown are current coupon and next coupon rate when security steps up.
#
  —   Portion or entire principal amount is held as collateral for open futures contracts.
TBA
  —   Settlement is on a delayed delivery or when-issued basis with a final maturity To Be Announced.
 
        
/\
  —   At August 31, 2006, the aggregate cost of investments for income tax purposes was $199,041,696. Net unrealized depreciation aggregated $354,051 of which $2,841,613 related to appreciated investment securities and $3,195,664 related to depreciated investment securities.

4

 

THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
August 31, 2006
Valuation of Investments: Where market quotations are readily available, securities held by the Fund are valued based upon the current bid price, except preferred stocks, which are valued based upon the closing price. Securities may be valued by independent pricing services that have been approved by the Board of Directors. The prices provided by a pricing service take into account broker dealer market price quotations for institutional size trading in similar groups of securities, security quality, maturity, coupon and other security characteristics as well as any developments related to the specific securities. The Fund values mortgage-backed securities (“MBS”) and other debt securities for which market quotations are not readily available (approximately 24% of the investments in securities held by the Fund at August 31, 2006) at their fair value as determined in good faith, utilizing procedures approved by the Board of Directors of the Fund, on the basis of information provided by dealers in such securities. Some of the general factors which may be considered in determining fair value include the fundamental analytic data relating to the investment and an evaluation of the forces which influence the market in which these securities are purchased and sold. Determination of fair value involves subjective judgment, as the actual market value of a particular security can be established only by negotiations between the parties in a sales transaction. Debt securities having a remaining maturity of sixty days or less when purchased and debt securities originally purchased with maturities in excess of sixty days but which currently have maturities of sixty days or less are valued at amortized cost.
The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry or region. The values of MBS can be significantly affected by changes in interest rates or in the financial condition of an issuer or market.
Reverse Repurchase agreements: The Fund may enter into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them at a mutually agreed upon date and price. Under the 1940 Act, reverse repurchase agreements will be regarded as a form of borrowing by the Fund unless, at the time it enters into a reverse repurchase agreement, it establishes and maintains a segregated account with its custodian containing securities from its portfolio having a value not less than the repurchase price (including accrued interest). The Fund has established and maintained such an account for each of its reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Fund’s obligation to repurchase the securities, and the Fund’s use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision.
At August 31, 2006, the Fund had the following reverse repurchase agreements outstanding:
             
        Maturity
Face Value   Description   Amount
$  2,031,000
  CS First Boston 5.30%, dated 08/29/06, maturity date 09/19/06   $ 2,037,279  
    7,333,000
  Goldman Sachs 5.30%, dated 08/22/06, maturity date 09/18/06     7,362,149  
  25,219,125
  Lehman Brothers 5.10%, dated 08/24/06, maturity date 09/07/06     25,269,143  
    7,291,000
  Lehman Brothers 5.30%, dated 08/28/06, maturity date 09/13/06     7,308,174  
    6,500,000
  Morgan Stanley 5.31%, dated 08/14/06, maturity date 09/21/06     6,536,433  
 
           
$48,374,125
            
             
 
            
 
  Maturity Amount, Including Interest Payable   $ 48,513,178  
 
           
 
  Market Value of Assets Sold Under Agreements   $ 50,096,987  
 
           
 
  Weighted Average Interest Rate     5.20 %
 
           

 

 

THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
August 31, 2006
The average daily balance of reverse repurchase agreements outstanding during the three months ended August 31, 2006, was approximately $50,879,993 at a weighted average interest rate of 5.63%. The maximum amount of reverse repurchase agreements outstanding at any time during the period was $51,092,129 as of June 12, 2006, which was 29.86% of total assets.
Swap agreements: The Fund may enter into swap agreements to manage its exposure to various risks. An interest rate swap agreement involves the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. A total rate of return swap agreement is a derivative contract in which one party (the receiver) receives the total return of a specific index on a notional amount of principal from a second party (the seller) in return for paying a funding cost, which is usually quoted in relation to the London Inter-Bank Offer Rate (“LIBOR”). During the life of the agreement, there are periodic exchanges of cash flows in which the index receiver pays the LIBOR based interest on the notional principal amount and receives (or pays if the total return is negative or spreads widen) the index total return on the notional principal amount. A credit default swap is an agreement between a protection buyer and a protection seller whereby the buyer agrees to periodically pay the seller a premium, generally expressed in terms of interest on a notional principal amount, over a specified period in exchange for receiving compensation from the seller when an underlying reference debt obligation is subject to one or more specified adverse credit events (such as bankruptcy, failure to pay, acceleration of indebtedness, restructuring, or repudiation/moratorium). The Fund will usually enter into swaps on a net basis, i.e., the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Swaps are marked to market based upon quotations from market makers and the change, if any, along with an accrual for periodic payments due or owed is recorded as unrealized gain or loss in the Statement of Operations. Net payments on swap agreements are included as part of realized gain/loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized in the Statement of Assets and Liabilities. Such risks include the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform, that there may be unfavorable changes in the fluctuation of interest rates or the occurrence of adverse credit events on reference debt obligations.
As of August 31, 2006, the following swap agreements were outstanding:
                 
            Net
            Unrealized
Notional Amount   Expiration Date   Description   Appreciation
$20,000,000
  10/11/10   Agreement with Morgan Stanley Capital Services, Inc., dated 10/07/05 to pay semi-annually the notional amount multiplied by 4.716% and to receive quarterly the notional amount multiplied by 3 month
USD-LIBOR-BBA. 		  $ 117,724  
11,000,000
  12/15/14   Agreement with Morgan Stanley Capital Services, Inc., dated 12/13/04 to pay semi-annually the notional amount multiplied by 4.555% and to receive quarterly the notional amount multiplied by 3 month
USD-LIBOR-BBA. 		    524,982  
 
               
 
          $ 642,706  
 
               
Financial Futures Contracts: A futures contract is an agreement between two parties to buy and sell a financial instrument for a set price on a future date. Initial margin deposits are made upon entering into futures contracts and can be either cash or securities. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by “marking-to-market” on a daily basis to reflect the market value of the contract at the end of each day’s trading. Variation margin payments are made or received, depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund’s basis in the contract.
The Fund invests in financial futures contracts to hedge against fluctuations in the value of portfolio securities caused by changes in prevailing market interest rates. Should interest rates move unexpectedly, the Fund may not achieve the anticipated benefits of the financial futures contracts and may realize a loss. The use of futures transactions involves the risk of imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets. The Fund is at risk that it may not be able to close out a transaction because of an illiquid market.

 

 

THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
August 31, 2006
As of August 31, 2006, the following futures contracts were outstanding:
Long:
                                 
Notional           Cost at   Value at   Unrealized
Amount   Type   Expiration Date   Trade Date   August 31, 2006   Appreciation
$8,200,000
  5 Yr. U.S. Treasury Note   December 2006   $ 8,591,396     $ 8,618,969     $ 27,573  

 

 

Item 2. Controls and Procedures.
(a) The Registrant’s principal executive officer and principal financial officer have concluded that the Registrant’s Disclosure Controls and Procedures are effective, based on their evaluation of such Disclosure Controls and Procedures as of a date within 90 days of the filing of this report on Form N-Q.
(b) As of the date of filing this Form N-Q, the Registrant’s principal executive officer and principal financial officer are aware of no changes in the Registrant’s internal control over financial reporting that occurred during the Registrant’s last fiscal quarter that has materially affected or is reasonably likely to materially affect the Registrant’s internal control over financial reporting.
Item 3. Exhibits
(a) Certifications for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Act. Filed herewith.

 

 

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
         
By:
  /s/ Clifford E. Lai    
 
       
 
  Clifford E. Lai    
 
  Principal Executive Officer    
 
        
Date: October 18, 2006    
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
         
By:
  /s/ Clifford E. Lai    
 
       
 
  Clifford E. Lai    
 
  Principal Executive Officer    
 
        
Date: October 18, 2006    
 
        
By:
  /s/ Thomas F. Doodian    
 
       
 
  Thomas F. Doodian    
 
  Treasurer and Principal Financial Officer    
 
        
Date: October 18, 2006