FrontPoint completes split from Morgan Stanley

BOSTON (Reuters) - FrontPoint Partners, the $4.5 billion hedge fund ensnared in the government's insider trading probe, is back on its own after more than four years of living with investment bank Morgan Stanley <MS.N>.

FrontPoint's co-chief executive officers told investors that the long-planned split from its corporate parent was now complete.

"Everyone at FrontPoint is focused on generating investment performance, and we are delighted to be moving forward as an independent entity with Morgan Stanley as our partner," Dan Waters and Mike Kelly wrote in a letter obtained by Reuters.

"As of March 1, 2011, the FrontPoint portfolio managers and senior management team will collectively own a majority of the equity ownership interest in FrontPoint," the pair wrote, adding that Morgan Stanley will retain a minority equity ownership.

The two companies announced plans to split up in October, roughly four years after Morgan Stanley bought the Greenwich, Connecticut-based fund for $400 million in 2006.

Law firm Schulte Roth & Zabel represented FrontPoint.

But the plans were slowed when only a few days later the fund became embroiled in the government's probe into how fund managers use industry experts to boost returns.

Late last year, FrontPoint's health care funds were forced to close down after a French physician was arrested and charged in early November with having illegally passed inside information to Joseph Skowron, a FrontPoint manager.

Neither Skowron nor FrontPoint have been charged with any wrongdoing.

People familiar with the firm said that investors pulled about $3.5 billion in assets in the wake of the investigation.

The decision to split from Morgan Stanley now allows FrontPoint portfolio managers, including Steve Eisman, arguably the firm's biggest star who cashed in on anticipating the housing market collapse long before anyone else, to operate more independently.

Eisman featured prominently in journalist Michael Lewis' best-selling book "The Big Short" and was said to be mulling his options. In January he said that he wants more control over his fund and more operational flexibility.

At its peak before the financial crisis in 2008, FrontPoint managed $10 billion.

(Reporting by Svea Herbst-Bayliss; Editing by Derek Caney, Bernard Orr)