CHICAGO -- UBS Asset Management created a new unit under the venerable O'Connor equity derivatives name to offer hedge fund-type global alternative investment strategies to pension funds and other investors.
UBS O'Connor LLC will be based in Chicago but operate separately from Brinson Partners Inc., UBS Asset Management's traditional portfolio investment unit.
Peter A. Wuffli, chief executive officer of UBS Asset Management, and Joseph F. Scoby, the new unit's managing director, CEO and chief investment officer, said growing demand by pension funds and other investors for these strategies prompted UBS to create the unit.
"The emergence of alternative investment managers has been explosive" in recent years, said Mr. Scoby.
J. Gary Fencik, managing director of Brinson Partners and head of business development and marketing, will move over to UBS O'Connor as one of two U.S. marketers, although he won't head marketing. Jeffrey Smith, who was deputy head of business development, will replace Mr. Fencik. UBS O'Connor will have four other marketers, all outside the United States.
Messrs. Wuffli and Scoby suggested total revenue produced by the high fee-generating alternative strategies might one day rival that of the lower-fee structure of conventional stock and bond investments.
They declined to reveal their typical fees. Alternative strategies in general often have a management fee of 2% of assets and a performance fee of 20% of returns exceeding a benchmark.
"The fee structure for alternative investments is very attractive," Mr. Wuffli said.
UBS O'Connor expects to have some $400 million to $500 million in new assets under management by July, Mr. Scoby said. He expects half of that to come from new U.S. clients. He declined to name them.
The new unit will be built around the O'Connor group, part of UBS Warburg investment bank. O'Connor and Associates, a U.S. equity derivatives trading firm, was bought in 1992 by Swiss Bank Corp., which ultimately was acquired by UBS AG in 1998.
"O'Connor still has a name in investment circles," said Mr. Wuffli. By branding the unit O'Connor, UBS "makes it very clear it is different from Brinson."
Mr. Scoby said the new unit is lifting 100 people, including him, from the group at Warburg to create UBS O'Connor.
The Warburg group had been doing proprietary alternative investing with mostly the bank's own capital. Plus, Warburg has been managing $1 billion for mostly offshore clients.
UBS O'Connor will offer outside investors alternative strategies in four areas:
* merger arbitrage, also known as risk arbitrage;
* a dynamically allocated portfolio consisting of the merger arbitrage, convertible arbitrage and fundamental long/short positions;
* funds of funds, in which it will hire outside hedge fund and other alternative strategies managers to create a diversified investment portfolio; and
* foreign exchange and interest-rate arbitrage trading as an asset class.
At UBS Warburg, the funds of funds and the foreign exchange interest-rate trading strategies each had about $500 million from clients, which will be moving to the new unit, Mr. Wuffli said. Some 95% of that money comes from offshore clients; none is from U.S. institutions.
The funds-of-funds strategies will focus on event-driven, market-neutral and dynamic trading strategies, Messrs. Wuffli and Scoby said.
They said UBS O'Connor also plans to differentiate itself from competitors on the issues of transparency and risk management controls.
"We will provide exhaustive transparency, which is becoming a key differential among firms," Mr. Scoby said.
He said the firm would be willing to disclose its investment positions to clients regularly.
The new unit will rely "on theoretical models we developed at O'Connor over the years," said Mr. Scoby. "Our objective is to develop products uncorrelated or low-correlated with the market."
In February, UBS bought a 24.9% interest in Prediction Co., Santa Fe, N.M., which builds models for predicting financial markets. The two also agreed to extend their contractual relationship, by which Prediction's research scientists and systems engineers develop technology that is deployed under an exclusive license to UBS.
Mr. Scoby said the staff's compensation includes participation in profits of the unit.
UBS wanted to offer the strategies to the market to gain fee revenue, more highly valued by shareholders than revenue generated by the bank's own proprietary trading. Mr. Wuffli expects the bank eventually will withdraw its capital from the strategies as outside investors move in, although he said no timetable has been set.
Also, because the alternative strategies were housed in UBS Warburg, conflicts with its investment banking activities sometimes precluded it from engaging in merger arbitrage trading. That problem was a consideration in separating the strategies into UBS O'Connor.
About 50 of the UBS O'Connor staff will be in Chicago, 25 in London, 20 in Stamford, Conn., and New York, and a few in Tokyo, Mr. Scoby said. He said UBS O'Connor plans to open an investment office in Hong Kong in the next six to 12 months.
Matthew R. Smith, managing director and principal, Lotsoff Capital Management, Chicago, which manages alternative strategies, said he wasn't surprised UBS is entering the market. The demand for alternative strategies is growing from fund sponsors globally, he added. Mr. Smith, who worked at O'Connor before it was acquired, said the firm has a good reputation.