Aug. 4 (Bloomberg) -- Dow Kim, the former head of trading and investment banking at Merrill Lynch & Co., abandoned 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.

New money coming into hedge fund 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.

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.

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.

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

Last Updated: August 4, 2008 18:21 EDT