Attempts by UBS to launch a hedge fund business using its proprietary traders ended in failure on Thursday 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 (£62m) first-quarter loss on US subprime mortgage investments, is an embarrassing end to a bold attempt by UBS to allow a team of fixed income proprietary traders to manage clients’ money. It is also a setback for John Costas, the US-based former chief executive of UBS’s investment banking arm, who stepped down in June 2005 to head DRCM.
The UBS move will trigger a $300m (£150m) restructuring charge, $200m of it being distributed to the 250 DRCM employees via stock for deferred compensation and retention payments.
Lex also of the Financial Times comments:
Two years ago, when the world was as besotted about hedge funds as it is about private equity today, UBS created Dillon Read Capital Management. Analysts’ and investors’ eyebrows rose. It looked like the Swiss bank was creating a plaything for John Costas, its global head of investment banking who may, or may not, have been about to walk. There were also concerns about the business structure. DRCM managed the fixed income funds that used to be run in-house alongside third-party assets. Having a unit at arms length from Zurich created potential conflicts.
On Thursday, UBS announced that DRCM would be closed down following a $123m trading loss in the first quarter of 2007, apparently related to difficulties in subprime in the US. For UBS to pull the plug so quickly as well as incurring a $300m restructuring charge indicates that there must have been insurmountable problems and that initial fears were well founded. Many will groan at the price of this misadventure – probably in excess of $500m – and the hit to credibility. But the management should be applauded for admitting its mistake so quickly and the one-off cost is worth less than 1 per cent of UBS’s market capitalisation.
