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Steve Eisman's FrontPoint is back on its own
October 20, 2010 / 7:35 PM / 7 years ago

Steve Eisman's FrontPoint is back on its own

BOSTON (Reuters) - Hedge fund manager Steve Eisman, who made millions by anticipating the housing market collapse long before anyone else did, is back on his own.

FrontPoint’s portfolio managers are buying back a majority stake in the firm from Morgan Stanley, (MS.N) four years after selling to the investment bank for roughly $400 million.

The sale, which will close in the fourth quarter, should help Morgan Stanley get out of a business that lawmakers are pushing banks to exit.

“The winds have certainly changed,” FrontPoint co-Chief Executive Michael Kelly said in an interview.

Now Eisman and dozens of other portfolio managers who collectively oversee about $7 billion in roughly two dozen investment strategies can pursue their trading strategies with less oversight and woo talent with whatever perks the independent hedge fund wants.

“This is a huge opportunity for the managers at FrontPoint,” said Thomas Whelan, chief executive of Greenwich Alternative Investments, which invests in hedge funds. “The group has critical mass, a strong track record of attracting talent and a strong track record in attracting assets.”

The sale of FrontPoint also comes after Eisman became something of a celebrity in the $1.7 trillion hedge fund world because of his starring role in The Big Short, Michael Lewis’ book that chronicles how a group of smart traders capitalized on the collapse of the U.S. housing market.

Morgan Stanley announced the deal on Wednesday when it reported a third-quarter loss.

Neither Morgan Stanley nor FrontPoint would give terms for the transaction.

Four years ago, Morgan Stanley’s then-chief executive John Mack pushed hard to buy the Greenwich, Connecticut-based-hedge fund firm which had historical connections to the Wall Street bank. FrontPoint was co-founded by a former Morgan Stanley chief financial officer, Phil Duff, in 2000.

With $5.5 billion in assets, FrontPoint was supposed to help beef up Morgan Stanley’s investment management unit. By 2008, the firm reached $10 billion in assets.

But results, apart from Eisman’s home run, have been seen as mixed and falling short of the outsized performance that many investors want to see from a hedge fund, people familiar with the fund firm said.

This summer, the Dodd-Frank financial reform law limited banks from making big bets with their own money and from owning large hedge funds and private equity firms. Named after former Federal Reserve Chairman Paul Volcker, who is championing the new laws, the rule helped push FrontPoint to regain its independence, according to its top managers.

But the Volcker rule only hastened negotiations that insiders said were underway for months as some FrontPoint partners wanted out and some at Morgan Stanley wanted them gone. According to insiders, some of the hedge fund mangers chafed at increased rules from the corporate parent even as the firm retained its independent offices.

Morgan Stanley still holds a minority stake in FrontPoint along with other minority stakes in hedge funds Avenue Capital, Lansdowne Partners and Traxis Partners.

Known for allowing dozens of teams to operate under its umbrella structure, FrontPoint co-CEOs Kelly and Waters said that it is planning to add people in the months ahead.

Already in the last 12 months, FrontPoint has added five new strategies -- U.S. event driven investing, emerging market macro bets, direct lending, Australia and emerging market health care -- and pulled in roughly $1 billion in new assets this year alone.

Additional reporting by Steve Eder in New York. Editing by Robert MacMillan

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