Does the unhappy history of Dillon Read Capital Management, the in-house, start-up hedge fund business into which UBS transferred 150 of its best proprietary traders in 2005 only to close it down at the start of May, provide any useful lessons to the rest of the investment banking industry?
Perhaps it is too odd an episode for that. The most obvious lesson, surely, is that proprietary traders are the key building block on which any securities business rests. If you can trade a market well, that makes you a player, puts you in the flows, provides market intelligence: all of that gives you the basis to build distribution to other investors that your investment bankers can then turn round and sell to issuers of securities to build a capital markets business.
Taking the proprietary traders out of a securities business en masse is a bizarre thing to do. UBS now faces the pain, entirely of its own making, of reintegrating those traders – who had been told they were part of a new hedge fund elite – back into their old shop alongside the survivors among those who had been left behind. Good luck!
Of course any firm might reason that, with the best traders quitting the investment banking industry to set up on their own, its traders are unlikely to be market leaders and more likely to be the market fools.