The Wall Street Journal reports that Morgan Stanley may soon complete a deal to relinquish control of in-house hedge fund firm FrontPoint Partners which currently has $7 billion in assets.  This move is motivated by a number of factors including the impact of new restrictions in the financial regulatory bill signed into law by President Obama last month, Morgan Stanley CEO James Gorman’s desire to reduce proprietary investing risks, and conflicts that have emerged due to bearish views expressed by FrontPoint regarding Morgan Stanley clients.

Morgan Stanley paid $400 million for FrontPoint in 2006 and currently values the firm at $350 million.  FrontPoint partners previously offered $150 million to buy back the firm from Morgan Stanley, but this would have triggered a large write down that Morgan Stanley was unwilling to take.  Specific terms of the deal presently under discussion were not disclosed.

It is not surprising that Morgan Stanley clients may have complained about FrontPoint given Steve Eisman’s outspoken views that have gained increasing prominence since publication of The Big Short, a book that documented Mr. Eisman’s successful bet on the implosion of the subprime mortgage market (click here for a review of the book).  Mr. Eisman has also made a bearish case against for-profit universities in a presentation at the Ira Sohn Investment Research Conference.

Disclosure:  None.