UBS hedge fund unit Dillon Read's closure late Tuesday is rumored to be the result of losses taken on poorly calculated derivative trades. The 2001 and 2002 positions which caused "idiosyncratic risk" for Dillon Read and its ultimate demise were rumored to be long bets on the subprime sector, sources said.


Dillon Read's failure -- which is expected to cost UBS roughly $300 million -- was taken as not only an embarrassment for UBS, but as a sign of things to come as investment banks shave off costly subprime mortgage exposure. The closure also stirred speculation of impending doom for hedge funds caught on the wrong side of the subprime sector, resulting in losses comparable to the legendary 1998 Long Term Capital Management blow-up.


Dillon Read, run by John Costas, was closed following a $124 million loss. The fund was established in June 2005 and managed $1.5 billion in an outside fixed-income fund and $3 billion of UBS money. The 2001 and 2002 positions rumored to have cost Dillon Read the most were inherited from a previously existing UBS portfolio.


Aside from the inherited positions, the fund had a rough time getting off the ground due to regulatory issues and difficulty raising outside capital, sources said. The fund opened in June 2005 but did not begin trading until the following year.


Ken Karl, Dillon Read's chief financial officer, left the fund in March. Costas will stay on as a senior advisor to the bank's executive board, according to UBS. Dillon Read's assets will be folded into UBS. The hedge fund unit has roughly 250 employees in New York, London, Singapore and Tokyo.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.