UBS to face O’connor Hedge-fund defections on bonus
UBS O’Connor LLC, the $6 billion hedge-fund unit within the biggest Swiss bank, risks upheaval as senior traders seek to defect after a clampdown on cash bonuses, two people with direct knowledge of the situation said.
Traders are contacting other hedge funds and recruiters after UBS AG moved them to a pay structure used throughout the firm, said the people, who requested anonymity because their plans to leave aren’t public. That resulted in immediate cash bonuses falling by 50 percent to 1 million Swiss francs ($1.06 million), and some deferred pay being tied to five-year UBS bonds rather than rein- vested in O’Connor funds, the people said. Departures may hamper CEO Sergio Ermotti’s efforts to rely more on wealth and asset management while cutting expenses by 3.4 billion francs in the next three years.
The potential defections show the struggles the biggest banks may face in retaining top traders at internal hedge funds amid shareholder and regulatory pressure on pay and rules that limit how much of a firm’s capital can be invested in the funds. “This structure is analogous to working within a bank,” said Ilana Weinstein, chief executive officer of New York-based search firm IDW Group LLC. “But what’s the likeness of O’Connor? It’s a hedge fund, and this structure is not competitive with working at another hedge fund.” Departures may hamper CEO Sergio Ermotti’s efforts to rely more on wealth and asset management while cutting expenses by 3.4 billion francs in the next three years. O’Connor manages about one-fifth of UBS’s 28 billion francs of alternative and quantitative investments, the Zurichbased company’s highest- margin asset-management group. UBS O’Connor invests only client funds and not the bank’s, the people said. “We believe our people choose to be here based on a combination of our team culture, access to client capital and UBS distribution,” Bill Ferri, head of the alternative and quantitative investments business, said in an e-mailed statement. “I am fully com- mitted to continuing to grow the O’Connor business and am confident that we can credibly compete while aligning with the long-term interests of our clients and UBS shareholders.”
O’Connor offers a global multistrategy fund, a fundamental marketneutral fund, and several long-short equity funds, according to its website. The unit has a staff of about 175, including about 90 front-office employees, according to a person with knowledge of the group. Most of the personnel are based in Chicago, with others in New York, London, Hong Kong, Singapore and Tokyo, the person said.
The unit’s core Global MultiStrategy Fund returned more than 8 percent to investors last year and more than 10 percent annually since its June 2000 inception, one of the people said. Multistrategy hedge funds fell 4.5 percent on average last year, according to data.
O’Connor’s trading teams report to Chief Investment Officer Dawn Fitzpatrick and the group’s traders include portfolio manager Kipp Schrage, the person said. All employees who made more than $250,000 in 2012 had at least 60 percent of their pay exceeding that amount deferred, UBS said earlier this year. The firm also lowered its cap on immediate cash bonuses to 1 million francs last year from 2 million francs for 2011. O’Connor traders will get half of their deferred pay in five-year debt that can be canceled if UBS’s Basel III tier 1 common ratio drops below 7 percent, the people said. The ratio under fully applied Basel III rules stood at 9.8 percent on Dec. 31.
O’Connor employees got 40 percent of their 2011 bonuses in cash, up to 2 million francs, and deferred pay was reinvested in O’Connor funds and vested in equal annual installments over three years, one of the people said. There were no caps on immediate cash bonuses before 2009, the person said.
The new bonus structure pulls traders’ incentives further away from hedge funds’ traditional fee system of 2 percent of assets and 20 percent of profits.