Unhedged

3 May 2007

The Swiss bank’s experiment in running its own trading book through an internal fund looks to have been a costly failure. To say this is a bit of an embarassment for the world’s largest money manager is putting it mildly. To say this is a bit of an embarrassment for the world’s largest money manager is putting it mildly.

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UBS is to close its Dillon Read Capital Management hedge fund arm less than two years after its launch.

DRCM, which was run by former UBS investment banking head, John Costas, ran up losses of $150m (SFr180m) in the first quarter. It is latest casualty of the falls in the US subprime mortgage market.

The fund was established in 2005 with responsibility for running part of the UBS's fixed income trading business. It also raised $1.5bn from thirdparty investors a year ago. These investors will be repaid when the DRCM closes its doors.

UBS said the fund was closing because it failed to meet expectations. Its 250 employees are to be reabsorbed into UBS's investment bank. The costs of closing the firm are estimated at $300m, although UBS said the oneoff cost would be offset by annual savings of roughly $200m.

The news came as UBS reported net profits of SFr3.3bn in the first quarter, compared with SFr3.5bn in the first quarter of 2006. The previous year's profits included a oneoff gain of SFr290m.

The wealth management business reported inflows of SF53bn, up from SF48bn a year earlier.

The investment banking division reported revenues of SF6.3bn, up 5% from the same quarter a year earlier. Over the same period its cost to income rose from 70.6% to 71.3%.

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