Major Wall Street firms like Morgan Stanley (NYSE:MS), Lehman (NYSE:LEH), and Citigroup (NYSE:C) are spending big bucks to get a piece of the hedge-fund bonanza. Unfortunately for shareholders, UBS (NYSE:UBS) is shelling out equally large amounts to escape it. Yesterday, the firm announced that it's ditching the Dillon Read Capital Management (DRCM) fund because of poor returns.

In comparison to the market's current boom times, UBS investors have suffered over the past year, with shares up only 7.6%. That weakness continued in UBS's first quarter, in which net income dipped 7% to $2.7 billion. On a brighter note, the investment banking and wealth management profits increased another 3% this year, on the back of hefty gains in 2006.

But DRCM was UBS's biggest dead weight. Launched in June 2005, and opened to outside investors just five months ago, the fund seemed to excel only at generating losses and fumbling with the Securities and Exchange Commission. UBS didn't quite know how to manage the difficult compliance issues of trading its own accounts, much less its clients' assets. To make matters worse, the fund focused heavily on the subprime market, at exactly the wrong time. Adding insult to injury, UBS will need to shell out $300 million to close down DRCM's operations.

Ironically, this week the New York Federal Reserve indicated that the hedge fund world is taking on risks that rival those of notorious hedge fund Long-Term Capital Management (LTCM). Back in 1998, LTCM collapsed, throwing its entire sector into temporary chaos.

With more than $1.4 trillion in current assets, the hedge fund business is much larger now than it was then, and still growing. So far, Wall Street seems unconcerned by the handful of failures within the industry in the past year.

It's encouraging that UBS took quick action to deal with DRCM's lackluster performance. Still, investors need to worry about the disruption the fund's closure will cause, and the possible departure of key employees. If you were considering investing in UBS, your most Foolish option might be to let the company get its house in order first.

Hedge your bets with further Foolishness:

Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 3,449 out of 27,827 in CAPS. The Fool has a disclosure policy.