UBS's attempts to launch a hedge fund business using its proprietary traders ended in failure yesterday when the Swiss bank announced it would fold Dillon Read Capital Management (DRCM) back into its investment banking arm less than two years after it was set up.
The decision, triggered by a SFr150m (€91 million) first-quarter loss at the unit, marks an embarrassing end to a bold attempt by UBS to allow a team of fixed income proprietary traders to manage clients' money.
The move will trigger a $300 million restructuring charge, but about $200 million of that will be distributed to the 250 DRCM employees via stock for deferred compensation and retention payments.
It is also a setback for John Costas, the respected former chief executive of UBS's investment banking arm, who stepped down in 2005 to head DRCM.
In recent years, the world's largest investment banks have grappled with the challenge of building their hedge-fund operations - the fastest-growing part of the fund management industry.
Morgan Stanley has spent hundreds of millions of dollars buying stakes in hedge funds on both sides of the Atlantic. However, UBS said its enthusiasm for hedge funds remained. It has $45 billion of assets in hedge funds and its Chicago-based O'Connor arm directly manages $6 billion.
UBS executives said the bank had underestimated the complexity of lifting the proprietary trading operation out of the investment bank and establishing it as a separate asset management business.
DRCM also struggled to raise money from external investors, attracting only $1.5 billion for its first fund, which closed at the end of last year.
The business, which employed about 250 people in Manhattan, will be reintegrated into the investment bank and funds will be returned to investors.
Peter Wuffli, UBS chief executive, said the decision was difficult but was the right choice. "It is natural with entrepreneurial activities that not everything you do succeeds," he said.
The unit's losses were caused by investments in the US subprime mortgage market. However, UBS stressed that its clients had not lost money.
Mr Costas will oversee the reintegration of DRCM, and will be a part-time senior adviser to UBS's executive board. - ( Financial Timesservice)
