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 people familiar with the situation.

Kim had been in discussions with institutions that had agreed to invest about $1 billion combined in his Diamond Lake Investment Group LP. The New York-based firm had hired 30 people based on the commitments. 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.

Kim had planned a multistrategy hedge fund but the current market conditions caused the initial investors to change their minds.