April 23, 2024

DealBook: FrontPoint to Shut Most Funds After Insider Charges

Steve Eisman, a star manager at FrontPoint, considered leaving in the wake of the allegations of insider trading.Daniel Acker/Bloomberg NewsSteve Eisman, a star manager at FrontPoint, considered leaving the firm in the wake of the allegations of insider trading.

FrontPoint Partners, once a multibillion-dollar hedge fund before it was battered by allegations of insider trading, will shut down most of its funds by the end of the month.

The decision to wind down and restructure its business is a surprising reversal of fortune for the hedge fund. Earlier this year, FrontPoint had appeared to have weathered the scandal when it raised $1 billion for a new fund. And in March, its co-chief executives, Dan Waters and Mike Kelly, announced that the firm had bought back majority ownership of itself from Morgan Stanley, concluding a long-delayed spinoff.

But the good news was short-lived as investors continued to flee the fund when the window for withdrawals opened earlier this month.

“We have received capital redemption requests from some of our clients and as always we will honor those requests,” FrontPoint said in a statement to The New York Times in response to questions. “These actions are affecting strategies differently at FrontPoint Partners and as a result we will be winding down select strategies.”

The firm declined to state how much money investors wanted back. But people who spoke to the fund’s executives say that FrontPoint was winding down most of its business.

Earlier on Thursday, a spokesman for the firm, Steve Bruce, had denied that the firm was shutting down.

FrontPoint is just one of several funds brought low by a widespread government crackdown on insider trading at hedge funds. Two funds, Level Global Investors and Loch Capital, shut down after raids by federal agents late last year linked to the broader investigation.

More broadly, FrontPoint’s move comes at a difficult time for the hedge fund industry, amid increased regulation and difficult markets. Some prominent managers like Stanley Druckenmiller, Chris Shumway and most recently Carl C. Icahn have left the field and manage their own money.

In many ways, the rise and fall of FrontPoint mirrors that of the industry itself. In late 2006, when owning a hedge fund was considered a smart way for banks to deploy capital, the firm was bought by Morgan Stanley for about $400 million.

Then, during the financial crisis, the hedge fund was lauded for the insight of one of its most colorful managers, Steve Eisman, who had placed a bet against the subprime mortgage market that earned him hundreds of millions and a major role in “The Big Short,” the best seller by Michael Lewis. Several other hedge fund managers, including John A. Paulson and the Harbinger Group founder Philip Falcone, also minted fortunes from their bets against the housing market.

But trouble began at FrontPoint in November last year when a French doctor was arrested by federal authorities and accused of leaking secret information about a clinical drug trial to an unnamed portfolio manager. It quickly became public that the portfolio manager was Joseph F. Skowron, a doctor who ran a health care portfolio at FrontPoint.

The firm, which managed about $7 billion at the time, placed Mr. Skowron on leave and terminated the entire health care team. Effort to reassure investors that Mr. Skowron’s fund was separate from the many others it ran failed. Clients withdrew $3.5 billion as they raced to the exits.

A long planned spinoff from Morgan Stanley — prompted by the Dodd-Frank financial overhaul — was delayed as result of the huge withdrawals and legal complications.

The tide seemed to turn in January, when the firm announced that a new fund that would lend money to midsize companies had raised $1 billion. At the time, Mr. Waters, one of the firm’s chief executives, indicated the firm’s transparency had paid off.

But weeks later, Mr. Eisman, FrontPoint’s star manager, told those close to him that he was considering leaving the firm, frustrated with the collateral damage his funds had suffered from the insider trading incident. Clients had withdrawn nearly $500 million from funds he managed, according to a person close to Mr. Eisman.

Last month, Mr. Skowron was formally charged by federal authorities, accused of conspiring to hide his role in a trading scheme that netted FrontPoint Partners more than $30 million. Mr. Skowron was leaked confidential tips about a drug trial by Yves M. Benhamou, a French doctor, who accepted envelopes stuffed with cash for the information.

Mr. Benhamou has pleaded guilty to insider trading and obstruction of justice.

FrontPoint declined to say which funds would be closed after the shakeout. The only fund they did indicate would remain open was the midsize lending fund, which has money committed for several years.

Article source: http://feeds.nytimes.com/click.phdo?i=d1377718695c741f2ce34385bc05263e

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