UBS's Costas to Build Hedge Fund Unit, Leave Board

Date: Thursday, June 30, 2005
Author: Bloomberg.com

UBS AG, the world's biggest asset manager, named investment banking chief John Costas to run a new hedge fund unit, seeking to avoid defections to the loosely- regulated funds that are luring some of Wall Street's top traders.

Costas, 48, will run Dillon Read Capital Management, taking with him 120 people from the team that makes fixed-income bets and commercial real-estate investments with UBS's own money, Chief Executive Officer Peter Wuffli said today. Equities chief Huw Jenkins, 47, will replace Costas.

UBS is holding onto Costas at a time when traders and executives from firms such as Goldman Sachs Group Inc. have been rushing into the hedge fund industry, where assets surpassed $1 trillion in the first quarter. Zurich-based UBS already manages $37.7 billion in hedge fund investments at its GAM unit.

One of Wuffli's main challenges ``is certainly to keep the big talents,'' said Christoph Ritschard, an analyst with Zuercher Kantonalbank who rates UBS shares ``overweight.'' ``UBS can certainly feel very happy, as well as John Costas, that a solution has been found.''

Hedge funds, loosely regulated portfolios designed for clients with at least $1 million to invest, attracted a net $27.4 billion during the first quarter, according to Chicago-based Hedge Fund Research Inc. Globally, the number of hedge funds has more than doubled to about 8,000 since 2000.

``It's no secret that if we lose people we lose them to hedge funds,'' Wuffli said in an interview. An internal hedge fund business helps ``extend the talent life cycle of some of our very successful traders and investment bankers,'' he said.

The shares of UBS were little changed at 100.1 Swiss francs at 11:18 a.m. Swiss time, valuing the bank at 112.9 billion francs ($88 billion).

Equities Leader

Jenkins, 47, is currently head of UBS's equities business, the leading underwriter of stocks and convertible bonds so far this year, according to data compiled by Bloomberg. He'll join UBS's group executive board starting July 1. Costas, who the company said expressed a desire to change jobs, will leave the board at the end of the year.

Costas joined UBS from Credit Suisse First Boston in 1996 and was named chief executive officer of the company's investment banking unit in December 2001.

Before becoming CEO, he worked as head of the company's U.S. fixed-income division and then became global head of the business. In 1999, he was promoted to chief operating officer of the investment banking business, then called UBS Warburg, and helped the company broaden its push into the U.S. In 2000, he worked to integrate Paine Webber Group Inc. into Switzerland's biggest bank, following the $11.5 billion purchase of the No. 4 U.S. broker.

`Huge Appetite'

``I am terrifically excited to have the opportunity to build this new business within UBS,'' said Costas, 48, in an e-mailed statement. ``Investors have a huge appetite for alternative investment products.''

Hedge funds have been luring investment bankers. Former Goldman Sachs Group Inc. partners Ron Beller and Geoff Grant in April said they planned to raise about $1 billion for London-based Peloton Partners LLP, which invests in the global fixed-income, currency and commodity markets.

Eric Mindich, who served as New York-based Goldman's chief strategy officer, introduced a fund last year, as did senior trader Dinakar Singh. Mindich opened Eton Capital Management with about $3.5 billion of assets.

Mack, Bennett

John Mack, ousted as head of Credit Suisse First Boston a year ago, announced plans earlier this month to become chairman of Pequot Capital Management Inc. to help manage the Westport, Connecticut-based hedge-fund company's expansion.

The New York Times reported today that Mack, 60, may instead succeed Philip Purcell as CEO of Morgan Stanley, where he worked for 29 years before losing a power struggle with Purcell.

When Credit Suisse First Boston, the securities unit of Switzerland's second-biggest bank, was faced with losing Bennett Goodman, one of the architects of its No. 1 ranked leverage finance unit, at the end of 2003, it offered him the firm's private and hedge fund investment groups to run.

Bennett stayed at the firm until this year, when Credit Suisse spun out his Credit Opportunities Fund. Credit Suisse retains a financial interest in the fund.

Costas's new unit, based in New York, will consist of about 120 employees from the fixed-income department who specialize in betting on price swings in government and corporate debt and run a portfolio of real-estate investments. Costas will report to John Fraser, who runs UBS's Global Asset Management business.

The unit's name is derived from Dillon, Read & Co., a U.S. investment bank that was founded in 1832 and acquired by Swiss Bank Corp. in 1997.

Compensation

The creation of Dillon Read is similar to what the bank did with its O'Connor unit in Chicago, Wuffli said. That business, which traded equity derivatives, was also moved into asset management so that it could take investments from clients, he said.

The principals in the Dillon Read unit, including Costas, ``will receive part of their compensation in the form of deferred elements that will be invested in the funds,'' Wuffli said, adding that compensation will be competitive with the industry.

Wuffli declined to specify how much capital would be put into the hedge fund unit, except to say that it would be in the ``billions'' of dollars.

Hedge funds generally charge at least 1 percent of assets under management and 20 percent of any profit they make. If, like the largest hedge funds, they manage several billion dollars in assets, that fee structure can translate into huge paychecks. The Top 10 highest paid hedge fund managers last year made between $205 million and $1 billion, according to a survey published by Institutional Investor's Alpha magazine.

``In this business everyone tries to be on their own,'' said Filippo de Luca, who helps oversee $1.1 billion in funds at LMF Servizi Finanziari SA in Lugano, Switzerland. ``In terms of money you can earn a lot more.''

UBS, owner of the world's largest private bank, is also merging its U.S., Swiss and international wealth management units to benefit from economies of scale, Wuffli said. Those businesses will be brought together with Swiss corporate and retail banking and the entire unit will be run by Marcel Rohner, 40, who had been head of the private banking business.

Mark Sutton, 50, head of UBS's Wealth Management USA business, the former Paine Webber, will become CEO for the Americas.

UBS's private bank oversaw 820 billion francs of client assets at the end of March, up 5 percent from Dec. 31. UBS's total managed assets stood at 2.36 trillion francs at the end of March.

To contact the reporter on this story:
Philipp Goellner in Zurich at  pgoellner@bloomberg.net