Steven Eisman, the investor known for betting against for-profit schools and subprime mortgages, is leaving FrontPoint Partners LLC and plans to start his own firm, according to two people briefed on the matter.
His FrontPoint hedge funds, Financial Horizons and Financial Services, will be liquidated, said the people, who asked not to be identified because the information is private. FrontPoint’s Quant Macro, Strategic Credit, Rockbay and Direct Lending funds will remain open.
Eisman, who gained prominence after he was profiled by Michael Lewis in his book “The Big Short: Inside the Doomsday Machine” (W.W. Norton & Co., 2010), returned 81 percent in 2007 in his Financial Horizons Fund, thanks to his subprime mortgage bet. His larger Financial Services fund has lost about 14 percent over the last 18 months, according to an investor, who asked not to be named because the information is private.
FrontPoint oversaw $7 billion at the start of November, before Chip Skowron, a co-portfolio manager of its health-care portfolio, was alleged by prosecutors to have traded on insider information. Skowron intends to plead not guilty to charges of conspiracy, securities fraud and obstruction, his lawyer said April 14.
Clients asked to withdraw money from Greenwich, Connecticut-based FrontPoint after the allegations and the firm shut down the health-care funds co-managed by Skowron. Firm-wide assets fell $4.5 billion by January.
The firm’s Multistrategy Fund, which invested in FrontPoint’s underlying funds, received redemption requests of about $500 million for the end of June, meaning some of that money would be pulled from Eisman’s portfolios, the people said. The client defections prompted Eisman, 48, to leave, they said. FrontPoint is closing the Multistrategy Fund.
Assets in Eisman’s funds had already fallen to $750 million in January from more than $1 billion in 2010. His Financial Services fund, which invests in the stocks and bonds of financial services companies, dropped 8.5 percent last year, and 5.3 percent in the first quarter of 2011, the investor said. Clients who choose to invest in Eisman’s new fund won’t pay a performance fee until those losses are recouped, the people said.
Carolyn Sargent, a spokeswoman for Eisman, declined to comment.
Eisman, who plans to start the new hedge fund with his team of about a half-dozen employees from FrontPoint, still needs to hire non-investment professionals to run the firm before he can open for business, the people said.
FrontPoint provides its portfolio managers with back- office, marketing and other operational functions, leaving them to concentrate on their investments.
Eisman last year started shorting, or wagering on declines, in for-profit education companies including ITT Educational Services Inc. and Apollo Group Inc. Those two stocks have fallen about 12 percent and 9 percent, respectively, in the past 12 months.
Even after reaping big gains in the past, Eisman’s recent losses will make it more difficult for him to raise money, one of the people said. His gruff and outspoken manner may add to the challenge.
Eisman once told a Japanese chief executive officer that his company’s financial statements were the equivalent of toilet paper, according to Lewis’s book.
“Even on Wall Street, people think he’s rude and obnoxious and aggressive,” Valerie Feigen, Eisman’s wife, told the author.
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