UBS has decided to fold its proprietary trading hedge fund operation Dillon Read Capital Management (DRCM) into the investment bank less than two years after unveiling plans to set up the

UBS has decided to fold its proprietary trading hedge fund operation Dillon Read Capital Management (DRCM) into the investment bank less than two years after unveiling plans to set up the operation under former investment bank chief executive John Costas.

UBS announced yesterday that the proprietary funds currently managed by Dillon Read Capital Management within UBS Global Asset Management will be folded back into the investment bank.

DRCM's principal finance, credit arbitrage and commercial real estate businesses will be merged with relevant business lines within the Investment Bank. DRCM's third party funds will be redeemed. UBS intends to work with DRCM investors to identify alternative investment opportunities for them.  DRCM will continue operations until the transition period is complete which is anticipated to be in Q3 2007.

"Operating a proprietary trading platform outside the Investment Bank and managing client money alongside became too complex and expensive. That, among other reasons, is why we have chosen to reintegrate DRCM into the Investment Bank and to redeem the outside investor funds," said John Fraser, Chairman and CEO of UBS Global Asset Management.

John Costas, the former chief executive of UBS's investment banking unit, who stepped down in June 2005 in order to take charge of DRCM, will oversee the reintegration of DRCM, and will then take a part-time role as senior adviser to UBS's executive board.

The reintegration of DRCM, which employs about 250 people and is reported to have suffered a SFr150m loss in the first three months of this year, is expected to trigger a restructuring charge of about USD 300m.

The majority of the employees will return to the investment bank, though UBS expects there will be some redundancies.

Peter Wuffli, Group CEO of UBS said: "UBS remains totally committed to alternative investment offerings for our clients. However, based on an assessment of a number of factors, we concluded that the DRCM initiative did not meet our expectations. Consequently we took this decisive action, which is in the best interests of our clients and shareholders."