FrontPoint Partners’ portfolio managers are taking back control of their hedge fund firm four years after they sold it to Morgan Stanley for around $400 million.

The sale of the $7 billion firm, which is best known for its bearish bets on subprime mortgages, comes as Wall Street is preparing for new rules that restrict limit holdings of hedge funds and private equity funds. It  is expected to close in the fourth quarter. Morgan Stanley will be left with a minority stake.

Financial terms were not disclosed.

The sale was announced as Morgan Stanley reported a loss for the third quarter and a big decline in trading revenue. The quarterly loss of $0.07s a share, or profit of $131 million before preferred dividends, compared with year-earlier earnings of $757 million, or $0.38 a share

"It is challenging for institutions like us, for lots of reasons, including conflicts, to fully own 100% of hedge funds," Morgan Stanley Chief Executive James Gorman said in a conference call.

“During the last four years we have continued to expand our investment capabilities, assets under management and investor base,” FrontPoint co-Chief Executive Daniel Waters said in a press release. “We have worked very closely with MSIM’s senior management on restructuring the FrontPoint relationship with Morgan Stanley to ensure that FrontPoint is best positioned to continue to deliver returns for our investors.”

Michael Kelly, another co-CEO, said Frontpoint, which allows dozens  of  teams of fund managers to share its administration and infrastructure, “will continue to add investment teams that complement our existing strategies.”

The sale comes after another FrontPoint portfolio manager, Steven Eisman, became something of a celebrity in the financial world because of his role in Michael Lewis’ book on the collapse of  the subprime mortgage indusry, "The Big Short." 

“I am especially pleased that my fellow portfolio managers support the restructuring of our relationship with Morgan Stanley, and that the FrontPoint investment culture will not change,” Eisman said in the press release.

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