The pending shutdown of UBS AG's Dillon Read hedge fund sets the stage for a likely tug-of-war between the Swiss-based investment bank and outside hedge funds, involving as many as 250 Dillon Read professionals.
Rather than stigmatize traders who took part in a failed venture, UBS is widely expected to fight to retain them in the face of overtures from hedge funds.
"There are a lot of high achievers" within Dillon Read, says Steve Yendell, managing consultant at London-based search firm Selby Jennings. "There will be other hedge funds that will be very keen to bring these people on board."
Dillon Read Capital Management lost 150 million Swiss francs in the first quarter, holding back parent UBS's net income, which declined 7 percent year-on-year for the quarter, to 3.28 billion francs. The fund was hurt by exposure to the U.S. sub-prime mortgage market, UBS said.
Discussing the quarterly results Thursday, the bank said Dillon Read "has not met our original expectations," and will be shut down, costing UBS a further $300 million.
About half the Dillon Read staff reportedly transferred from the parent's fixed-income investment banking operation in 2005, when UBS created the fund as an inducement to keep John Costas, then head of investment banking, from jumping ship.
UBS says Costas will stay on "in an advisory role." CFO Clive Standish told Bloomberg News that Dillon Read President Michael Hutchins will leave the company, but "most" of the unit's 250 employees will be absorbed back into the investment bank.
Stay or Go?
Yendell expects most of the Dillon Read team will be persuaded to stay at UBS, although "there will obviously be a few casualties."
However, London-based analysts at Morgan Stanley cited the risk of an exodus when lowering their rating on UBS shares to "underweight" from "equal-weight," Bloomberg reported.
The Swiss bank also faces a potential threat from its own recently departed president of investment banking for the Americas. Ken Moelis parted ways with UBS in March, reportedly after clashing with senior management about the pace of involvement in leveraged buyouts. On Wednesday, The Wall Street Journal's DealJournal speculated that an unknown number of UBS bankers are set join a new boutique investment bank that Moelis is assembling in Los Angeles.