Risk Latte - Swapping in-house profits for hedge fund Returns: UBS and Aman Capital

Swapping in-house profits for hedge fund Returns: UBS and Aman Capital

Rahul Bhattacharya
Jul 05, 2005

What can a bank do when it finds that its star traders and risk managers are leaving to set up a hedge fund? The answer is simple: invest in the fund and become its prime broker.

It is now clear that the large Swiss banking group, UBS, has been very closely associated with Aman Capital, the failed hedge fund that went under a few months ago due to large derivatives losses (allegedly KOSPI derivatives). Apparently, from media sources it is learnt that Aman Capital lost around $43 million in April 2005 alone which was close to 20% of the funds total assets.

UBS was connected to Aman Capital in three ways:

  1. Three of the five Aman fund managers actually came from UBS - they were former UBS traders. One of them was Michael Syn, who quit after the losses were incurred.
  2. UBS was the fund's prime broker, and often sourcing new investors for the fund as well as offering services such as stock lending and credit trading.
  3. Finally, GAM was supposedly the one of the biggest investors of Aman Capital. GAM is itself a specialist fund and is owned by UBS. GAM is believed to have invested around $150 million which translates to equivalent of around 60% of the fund's assets.

As far as UBS is concerned what it has done is to effectively create a P & L swap by swapping the in-house trading profits on derivatives and proprietary trades with hedge fund returns. By being a prime broker to Aman the bank has earned brokerage fees which probably more than compensated for the loss in trading activity due to the departure of its former employees. Further, it thought that by being an investor in the fund it could generate above average positive return as well in the long run. That didn't happen though.

(Taken from (and sometimes quoted ad verbatim): Financial Times, Monday, July 4, 2005.

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