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: February 28, 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 270.30bl-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)
February 28, 2006
                                 
                    Principal        
    Interest             Amount        
    Rate     Maturity     (000s)     Value  
U.S. GOVERNMENT & AGENCY OBLIGATIONS — 79.4%
                                
 
                                
U.S. Government Agency Pass-Through Certificates — 60.2%
                                
 
                                
Federal Home Loan Mortgage Corporation
                                
Pool A14559
     6.50 %     09/01/33     $ 2,362     $ 2,418,066  
Pool C68878
     7.00       06/01/32       463       479,320  
Pool C69047
     7.00       06/01/32       1,055       1,090,331  
Pool G01466
     9.50       12/01/22       1,270       1,396,591  
Pool 555559
     10.00       03/01/21       1,347       1,493,576  
 
                              
 
                                
 
                             6,877,884  
 
                              
Federal National Mortgage Association
                                
TBA
     6.00       12/01/99       5,000       5,040,625  
Pool 29596
     5.50       12/01/99       5,000       4,953,125  
Pool 694391
     5.50       03/01/33       3,816       3,788,618  
Pool 753914
     5.50       12/01/33       8,124 @     8,066,316  
Pool 754355
     6.00       12/01/33       4,765 @     4,813,719  
Pool 761836
     6.00       06/01/33       3,160       3,194,890  
Pool 763643
     6.00       01/01/34       7,220 @     7,289,116  
Pool 255413
     6.50       10/01/34       8,635 @     8,843,976  
Pool 323982
     6.50       10/01/06       170       171,007  
Pool 795367
     6.50       09/01/34       4,143 @     4,242,593  
Pool 809989
     6.50       03/01/35       4,047 @     4,144,464  
Pool 626299
     7.00       06/01/32       477       493,937  
Pool 635095
     7.00       06/01/32       852       881,418  
Pool 641575
     7.00       04/01/32       323       334,214  
Pool 645399
     7.00       05/01/32       2,476       2,562,402  
Pool 645466
     7.00       05/01/32       2,523       2,611,299  
Pool 650131
     7.00       07/01/32       1,524       1,577,786  
Pool 819251
     7.50       05/01/35       3,601       3,769,362  
Pool 398800
     8.00       06/01/12       649       684,894  
Pool 827854
     8.00       10/01/29       2,304       2,462,607  
Pool 636449
     8.50       04/01/32       2,226       2,408,077  
Pool 823757
     8.50       10/01/29       3,750       4,052,670  
Pool 458132
     9.44       03/15/31       1,760       1,931,228  
 
                              
 
                                
 
                             78,318,343  
 
                              
Total U.S. Government Agency Pass-Through Certificates
                 (Cost — $86,389,612)
                             85,196,227  
 
                              
 
                                
U.S. Treasury Obligations — 19.2%
                                
 
United States Treasury Notes
                                
 
     4.00       02/15/15       1,173       1,122,047  
 
     4.25       11/15/14       26,800 @     26,111,160  
 
                              
 
                                
Total U.S. Treasury Obligations
                 (Cost — $28,018,087)
                             27,233,207  
 
                              
 
                                
Total U.S. Government & Agency Obligations
                 (Cost — $114,407,699)
                             112,429,434  
 
                              
 
                                
ASSET-BACKED SECURITIES — 23.4%
                                
 
                                
Housing Related Asset-Backed Securities — 21.7%
                                
 
                                
Asset Backed Funding Certificates
                                
Series 2005-AQ1, Class B1* (b)
     5.75/6.25       06/25/35       993       843,709  
Series 2005-AQ1, Class B2* (b)
     5.75/6.25       06/25/35       1,050       870,396  
 
                              
 
                                
 
                             1,714,105  
 
                              

1

 

THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments — (Unaudited)
February 28, 2006
                                 
                    Principal        
    Interest             Amount        
    Rate     Maturity     (000s)     Value  
ASSET-BACKED SECURITIES (continued)
                                
 
                                
Bank of America Funding Corp.
                                
Series 2005-2, Class B4
     5.66 %†     04/25/35     $ 872     $ 744,590  
Series 2005-2, Class B5
     5.66 †     04/25/35       698       461,776  
Series 2005-2, Class B6
     5.66 †     04/25/35       524       176,856  
 
                              
 
                                
 
                             1,383,222  
 
                              
First Franklin Mortgage Loan Asset Backed Certificates
                                
Series 2004-FFH1, Class B* (a)
     8.08 †     03/25/34       1,550       1,467,073  
Series 2004-FF2, Class B* (a)
     8.08 †     03/25/34       900       858,933  
Series 2004-FFH2C, Class B1* (a)
     8.08 †     06/25/34       1,250       1,143,496  
Series 2004-FF8, Class B4* (a)
     8.08 †     10/25/34       1,250       1,161,783  
 
                              
 
                                
 
                             4,631,285  
 
                              
Green Tree Financial Corp.
                                
Series 1997-3, Class M1
     7.53       03/15/28       2,000       1,240,000  
Series 1995-6, Class M1
     8.10       09/15/26       4,325       4,472,785  
 
                              
 
                                
 
                             5,712,785  
 
                              
Harborview Mortgage Loan Trust
                                
Series 2005-14, Class B4*
     5.53 †     12/19/35       394       328,314  
Series 2005-1, Class B4* (a)
     6.32 †     03/19/35       629       529,826  
Series 2005-1, Class B5* (a)
     6.32 †     03/19/35       914       611,921  
Series 2005-1, Class B6* (a)
     6.32 †     03/19/35       1,144       228,738  
Series 2005-2, Class B4* (a)
     6.32 †     05/19/35       1,488       1,225,284  
 
                              
 
                                
 
                             2,924,083  
 
                              
Mid-State Trust
                                
Series 2004-1, Class M2
     8.11       08/15/37       1,502       1,557,813  
Option One Mortgage Loan Trust
                                
Series 2006-1, Class M7
     5.73       01/25/36       3,000       2,999,994  
Structured Asset Investment Loan Trust
                                
Series 2004-4, Class B* (b)
     5.00/5.50       04/25/34       1,500       1,314,845  
Series 2004-11, Class M9 (b)
     5.00/5.50       01/25/35       1,900       1,787,647  
Series 2004-7, Class B (a)
     7.08 †     08/25/34       2,161       1,941,502  
Series 2004-8, Class B1 (a)
     7.08 †     09/25/34       1,000       945,857  
Series 2004-10, Class M7 (a)
     7.08 †     11/25/34       2,000       2,021,898  
Series 2004-2, Class B* (a)
     7.58 †     03/25/34       1,074       968,619  
 
                              
 
                                
 
                             8,980,368  
 
                              
Structured Asset Securities Corporation
                                
Series 2005-6, Class B5
     5.34 †     05/25/35       495       398,255  
Series 2005-6, Class B6
     5.34 †     05/25/35       495       311,652  
Series 2005-6, Class B7
     5.34 †     05/25/35       347       104,022  
 
                              
 
                                
 
                             813,929  
 
                              
 
                                
Total Housing Related Asset-Backed Securities
                  (Cost — $31,312,444)
                             30,717,584  
 
                              
 
                                
Non-Housing Related Asset-Backed Securities — 1.7%
                                
 
                                
Airplanes Pass Through Trust
                                
Series 1R, Class A8
    (Cost — $2,208,028)
     4.95 †     03/15/19       2,573       2,431,879  
 
                              
 
                                
Total Asset-Backed Securities
                  (Cost — $33,520,472)
                             33,149,463  
 
                              

2

 

THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments — (Unaudited)
February 28, 2006
                                 
                    Principal        
    Interest             Amount        
    Rate     Maturity     (000s)     Value  
COMMERCIAL MORTGAGE BACKED SECURITIES — 17.4%
                                
 
                                
Bear Stearns Commercial Mortgage Securities
                                
Series 1999-C1, Class D
     6.53 %     02/14/31     $ 2,500     $ 2,629,675  
Series 2000-WF1, Class E
     7.89 †     02/15/32       2,000       2,168,880  
 
                              
 
                                
 
                             4,798,555  
 
                              
CD 2006 CD2*
     5.65       01/11/46       1,000       920,959  
Chase Commercial Mortgage Securities Corp.
                                
Series 2000-2, Class I*
     6.65       07/15/32       1,000       628,359  
GE Capital Commercial Mortgage Corp.
                                
Series 2002-2A, Class G*
     6.04       08/11/36       3,000       3,091,986  
Series 2000-1, Class G*
     6.13       01/15/33       1,000       508,000  
Series 2002-2A, Class H*
     6.31       08/11/36       2,000       2,088,120  
 
                              
 
                                
 
                             5,688,106  
 
                              
JP Morgan Chase Commercial Mortgage Securities
                                
Series 2003-LN1, Class G*
     5.48 †     10/15/37       1,600       1,569,962  
Morgan Stanley Capital I
                                
Series 1999-FNV1, Class E
     7.19 †     03/15/31       2,000       2,099,180  
Nationslink Funding Corp.
                                
Series 1998-2, Class E
     7.11       08/20/30       4,000       4,195,080  
UBS 400 Atlantic Street Mortgage Trust
                                
Series 2002-C1A, Class B3*
     7.19       01/11/22       2,000       2,113,020  
Wachovia Bank Commercial Mortgage Trust
                                
Series 2005-C16, Class H*
     5.30 †     10/15/41       2,000       1,853,648  
Series 2004-WL4A, Class H*
     5.42 †     10/15/15       700       700,197  
 
                              
 
                                
 
                             2,553,845  
 
                              
 
                                
Total Commercial Mortgage Backed Securities
           (Cost — $24,879,201)
                             24,567,066  
 
                              
 
                                
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES — 25.0%
                                
 
                                
Subordinated Collateralized Mortgage Obligations — 25.0%
                                
 
Bank of America Alternative Loan Trust
                                
Series 2004-3, Class 30B4*
     5.50       04/25/34       992       827,709  
Series 2004-3, Class 30B5
     5.50       04/25/34       694       446,788  
 
                              
 
                                
 
                             1,274,497  
 
                              
Bank of America Mortgage Securities, Inc.
                                
Series 2004-A, Class B4
     3.91 †     02/25/34       2,037       1,895,460  
Series 2003-10, Class 1B4
     5.50       01/25/34       556       503,606  
Series 2002-10, Class 1B3
     6.00       11/25/32       1,437       1,423,634  
 
                              
 
                                
 
                             3,822,700  
 
                              
Cendant Mortgage Corp.
                                
Series 2002-4, Class B1
     6.50       07/25/32       2,575       2,566,897  
Series 2002-4, Class B2
     6.50       07/25/32       1,030       1,027,133  
Series 2002-4, Class B3
     6.50       07/25/32       602       584,577  
Series 2002-4, Class B4
     6.50       07/25/32       344       322,035  
Series 2002-4, Class B5
     6.50       07/25/32       258       239,016  
Series 2002-4, Class B6*
     6.50       07/25/32       344       274,985  
 
                              
 
                                
 
                             5,014,643  
 
                              
First Horizon Alternative Mortgage Securities
                                
Series 2005-AA6, Class B4
     5.47 †     08/25/35       849       688,616  
Series 2005-AA6, Class B5
     5.47 †     08/25/35       799       514,575  

3

 

THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments — (Unaudited)
February 28, 2006
                                 
                    Principal        
    Interest             Amount        
    Rate     Maturity     (000s)     Value  
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES (continued)
                                
 
                                
Series 2005-AA6, Class B6
     5.47 %†     08/25/35     $ 499     $ 129,841  
 
                              
 
                                
 
                             1,333,032  
 
                              
First Horizon Mortgage Pass-Through Trust
                                
Series 2005-4, Class B4*
     5.45 †     07/25/35       424       344,665  
Series 2005-5, Class B4*
     5.46 †     10/25/35       726       586,909  
Series 2005-5, Class B5*
     5.46 †     10/25/35       544       327,242  
Series 2005-5, Class B6*
     5.46 †     10/25/35       545       160,892  
Series 2005-3, Class B4
     5.50       06/25/35       455       369,148  
 
                              
 
                                
 
                             1,788,856  
 
                              
G3 Mortgage Reinsurance Ltd.
                                
Series 1, Class E*
     24.58 †     05/25/08       4,186       4,603,656  
JP Morgan Mortgage Trust
                                
Series 2003-A1, Class B4
     4.49 †     10/25/33       535       468,464  
Residential Finance Limited Partnership
                                
Series 2002-A, Class B7
     10.27 †     10/10/34       1,910       1,955,848  
Residential Funding Mortgage Securities I, Inc.
                                
Series 2004-S1, Class B2
     5.25       02/25/34       450       295,594  
Series 2003-S7, Class B2
     5.50       05/25/33       525       188,880  
Series 2003-S7, Class B3
     5.50       05/25/33       318       220,771  
 
                              
 
                                
 
                             705,245  
 
                              
Resix Finance Limited Credit-Linked Note
                                
Series 2005-C, Class B7*
     7.67 †     09/10/37       1,989       1,949,019  
Series 2004-C, Class B7*
     8.07 †     09/10/36       981       980,513  
Series 2004-B, Class B8*
     9.32 †     02/10/36       795       806,532  
Series 2003-CB1, Class B8*
     11.32 †     06/10/35       957       995,153  
Series 2004-B, Class B9*
     12.82 †     02/10/36       1,217       1,253,755  
Series 2004-A, Class B10*
     16.07 †     02/10/36       486       503,153  
 
                              
 
                                
 
                             6,488,125  
 
                              
Structured Asset Mortgage Investments, Inc.
                                
Series 2002-AR1, Class B4
     5.73 †     03/25/32       564       555,546  
Washington Mutual Mortgage Securities Corp.
                                
Series 2002-AR12, Class B4
     4.66 †     10/25/32       851       822,467  
Series 2002-AR12, Class B5
     4.66 †     10/25/32       638       602,483  
Series 2002-AR12, Class B6
     4.66 †     10/25/32       1,065       787,815  
Series 2002-AR10, Class B4*
     4.95 †     10/25/32       850       825,954  
Series 2002-AR10, Class B5*
     4.95 †     10/25/32       637       601,636  
Series 2002-AR10, Class B6*
     4.95 †     10/25/32       1,064       787,205  
Series 2002-AR11, Class B5
     5.13 †     10/25/32       558       547,899  
Series 2002-AR11, Class B6
     5.13 †     10/25/32       748       577,466  
Series 2005-AR2, Class B10(a)
     5.64 †     01/25/45       1,790       1,475,129  
 
                              
 
                                
 
                             7,028,054  
 
                              
Wells Fargo Mortgage Backed Securities Trust
                                
Series 2002, Class B5
     6.00       06/25/32       358       350,182  
 
                              
 
                                
Total Subordinated Collateralized Mortgage Obligations
         (Cost — $34,453,141)
                             35,388,848  
 
                              
 
                                
Total Non-Agency Residential Mortgage Backed Securities
         (Cost — $34, 453,141)
                             35,388,848  
 
                              
 
                                
SHORT TERM INVESTMENTS — 0.0%
                                
 
                                
United States Treasury Bills
                                
(Cost — $49,188)
     0       06/15/06       50 #     49,344  
 
                              

4

 

THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments — (Unaudited)
February 28, 2006
         
Total Investments — 145.2%
(Cost — $207,309,701)
     205,584,155  
 
        
Liabilities in Excess of Other Assets — (45.2)%
     (63,953,893 )
 
      
 
        
NET ASSETS — 100.0%
   $ 141,630,262  
 
      
 
@
  —   Portion or entire principal amount delivered as collateral for reverse repurchase agreements.
 
        
†
  —   Variable Rate Security: Interest rate is the rate in effect February 28, 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 February 28, 2006, the aggregate cost of investments for income tax purposes was $207,309,701. Net unrealized depreciation aggregated $1,725,546 of which $2,381,063 related to appreciated investment securities and $4,106,609 related to depreciated investment securities.

5

 

THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
February 28, 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 28% of the investments in securities held by the Fund at February 28, 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 February 28, 2006, the Fund had the following reverse repurchase agreements outstanding:
                 
            Maturity  
Face Value     Description   Amount  
$ 4,691,000    
CS First Boston 4.61%, dated 02/27/06, maturity date 03/28/06
   $ 4,708,421  
  8,600,000    
Goldman Sachs 4.61%, dated 02/07/06, maturity date 04/05/06
     8,662,773  
  24,667,500    
Lehman Brothers 4.40%, dated 02/22/06, maturity date 03/07/06
     24,706,694  
  7,771,000    
Lehman Brothers 4.57%, dated 02/16/06, maturity date 03/16/06
     7,798,622  
  8,748,000    
Morgan Stanley 4.60%, dated 02/14/06, maturity date 03/21/06
     8,787,123  
  3,966,000    
Morgan Stanley 4.60%, dated 02/14/06, maturity date 03/21/06
     3,983,737  
     
 
      
$ 58,443,500    
 
        
     
 
        
 
       
Maturity Amount, Including Interest Payable
   $ 58,647,370  
       
 
      
       
Market Value of Assets Sold Under Agreements
   $ 59,268,751  
       
 
      
       
Weighted Average Interest Rate
     4.51 %
       
 
      

6

 

THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
February 28, 2006
The average daily balance of reverse repurchase agreements outstanding during the three months ended February 28, 2006, was approximately $61,064,696 at a weighted average interest rate of 4.27%. The maximum amount of reverse repurchase agreements outstanding at any time during the period was $67,450,038 as of December 15, 2005, which was 32.06% of total assets.
Swap agreements: The Fund may enter into interest rate swap agreements to manage its exposure to interest rates. Interest rate swap agreements involve 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. The Fund will usually enter into interest rate 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 of interest on interest rate 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 on the Statement of Assets and Liabilities. Such risks involve 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 or that there may be unfavorable changes in the fluctuation of interest rates.
As of February 28, 2006, the following swap agreements were outstanding:
                         
                    Net  
        Expiration         Unrealized  
Notional Amount     Date     Description   Appreciation  
  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.
   $ 393,924  
  20,000,000       10/11/10    
Agreement with Morgan Stanley Capital Services, Inc., dated 10/7/05 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.
     31,099  
               
 
      
               
 
   $ 425,023  
               
 
      
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.
As of February 28, 2006, the following futures contracts were outstanding:
Long:
                                         
Notional               Cost at   Value at   Unrealized
Amount   Type   Expiration Date   Trade Date   February 28, 2006   Appreciation
$ 9,400,000    
5 Yr. U.S. Treasury Note
   June 2006   $ 9,863,362     $ 9,887,625     $ 24,263  

7

 

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.

8

 

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: April 20, 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:
  April 20, 2006    
 
        
By:
  /s/ Thomas F. Doodian    
 
       
 
  Thomas F. Doodian    
 
  Treasurer and Principal Financial Officer    
 
        
Date:
  April 19, 2006    

9