Aug. 5 (Bloomberg) -- Dow Kim, the former head of trading and investment banking at Merrill Lynch & Co., dropped plans to start a hedge fund after investors backed out, according to two people with knowledge of the matter.

Kim had been in discussions with institutions that had agreed to invest about $1 billion combined in his Diamond Lake Investment Group LP, said the people, who asked not to be identified because the talks were private. The New York-based firm had hired 30 people based on the commitments.

The evaporation of credit and declines surpassing 20 percent in some stock markets caused the initial investors to change their minds, said the people. Kim had planned a multistrategy hedge fund that would trade everything from equities to bonds to currencies.

``Investors don't want to put new money to work, much less give it to a new entity,'' said Brad Balter, managing partner of Balter Capital Management LLC in Boston, which farms out $350 million to hedge funds.

New money coming into hedge funds slowed to $29 billion in the first half of the year, compared with $118 billion in the same period last year, according to Chicago-based Hedge Fund Research Inc.

Diamond Lake hires included David Milch, former head of prime-brokerage services at Merrill Lynch, as chief operating officer; Karl Wachter, former general counsel at Amaranth Advisors LLC, as general counsel; and Bernd Wuebben, former head of fixed-income trading strategies at Bear Stearns.

Merrill Exit

Kim, 45, declined to comment. He was the second-highest- paid executive at New York-based Merrill in 2006, when he made $37 million. He left in May 2007 after 13 years at the third- biggest U.S. securities firm.

When Kim left, Chief Executive Officer Stanley O'Neal said Merrill would ``benefit from his investment expertise by forming an affiliation with Kim's new firm.''

Merrill later dropped plans to be an investor.

A native South Korean, Kim joined Merrill in 1994 and became head of debt trading in Tokyo. He was promoted to co-head of trading and investment banking in 2003. Trading revenue at Merrill doubled to $14.9 billion in 2006 while he oversaw the business.

Kim led Merrill's push into commodities trading, and also oversaw the $1.3 billion acquisition of First Franklin Financial in 2006 that made Merrill one of the biggest underwriters of subprime mortgages.

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net

Last Updated: August 5, 2008 10:50 EDT