John Costas, who used to run the investment-banking division
of UBS, dealt frequently with hedge fund managers who were making vastly more
money than he was. So he decided to quit UBS and join them. UBS, in an effort
to retain him, basically allowed him to set up his hedge fund in-house. They
even allowed him to give it a storied name, Dillon Read: one of the many acquistions
that Swiss Bank made before it got swallowed by UBS. "We have the chance
to be the No. 1 alternative asset management company in the world," he
the New York Times at the time.
Or, you know, he could fall
flat on his face. It turns out that hedge funds, who often profit from others’
misfortunes, are sometimes equally capable of playing the schmuck:
Chief Executive Officer Peter Wuffli said in a statement that the hedge fund,
Dillon Read Capital Management, "did not meet our expectations."
The bank, which gave Costas control of the fund to keep him from leaving,
will now pay $300 million to shut it down after Dillon Read’s 150 million
francs of losses led to lower fixed-income revenue…
The losses at the hedge fund were "related to the U.S. mortgage-backed
securities market, which was obviously weakened by the U.S. subprime market,"
[UBS CFO] Standish said.
One wonders what the implications of the Dillon Read implosion are for Goldman
Sachs, which has pretty much exactly the same strategy, albeit with much more
success. Is there something in the water at 85 Broad Street which makes Goldman
immune from such blow-ups? Has it just been lucky? Or does it just appreciate
that good investment-bank managers don’t necessarily make great hedge-fund managers?
In any case, it’s hard to see Costas recovering from this blow. He’s made more
than enough money to live very comfortably for the rest of his life, and that’s
probably what he’s going to do. His dreams of dynastic wealth will have to fade
away.