UBS is to shut down Dillon Read Capital Management - a fund established two years ago by the bank's former head of investment banking, John Costas, with an investment of between $3 billion and $3.5 billion.

UBS chief executive, Peter Wuffli, said: "Based on an assessment of a number of factors, we concluded that the DRCM initiative did not meet our expectations. Consequently we took this decisive action, which is in the best interests of our clients and shareholders."

DRCM’s principal finance, credit arbitrage and commercial real estate businesses will be merged with relevant business lines within the investment bank, according to a statement from UBS.

DRCM’s third party funds will be redeemed and UBS intends to work with DRCM investors to identify alternative investment opportunities for them.

UBS has said it will spend $300 million on "re-integration", including recalling staff who were seconded to the hedge fund.

The Swiss bank set up DRCM partly to deter talented staff from leaving to set up independent hedge funds.

UBS had previously said it would set aside an extraordinary guaranteed $1 billion in bonuses in the next three years for staff at DRCM in a further effort to get star managers to stay at the bank.