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.

Morgan Stanley's divestiture 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 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.

"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 on a conference call.

"During the last four years we have continued to expand our investment capabilities, assets under management and investor base," FrontPoint's co-chief executive, Daniel Waters, said in a press release.

"We have worked very closely with [Morgan Stanley Investment Management'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."

FrontPoint portfolio managers include Steven Eisman, who became something of a celebrity in the financial world because of his role in Michael Lewis' book on the collapse of the subprime mortgage industry, "The Big Short."

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