NEW YORK — FrontPoint Partners, whose equity financial services hedge funds returned more than 60% last year largely by betting against companies involved with subprime mortgages, plans to raise a new fund that will buy beaten down debt in the sector.
The new fund will be led by a team of about six managers and analysts from C-Bass LLC, a battered company that bought and repackaged subprime mortgages and which is now being dismantled, said Steve Eisman, portfolio manager of FrontPoint's financial funds.
Eisman will manage the new fund together with Marc Rosenthal and Noelle Savarese, who were co-heads of capital markets at C-Bass. They joined FrontPoint, a unit of Morgan Stanley, this week and expect to begin fundraising next month, with a goal of raising at least $500 million from institutional investors.
"There will continue to be shorting opportunities in certain asset classes, but going forward you need to be able to buy distressed stuff," Eisman said. The new fund, which hasn't yet been named, will buy and sell short collateralized debt obligations and other asset-backed debt.
Eisman's two funds — Frontpoint Financial Services and FrontPoint Financial Services Horizon — have about $1.5 billion of assets. The smaller Horizon fund, which uses more debt, was formed two years ago and was up more than 80% last year. The larger fund was formed in 2004 and gained about 65%, Eisman said.
The funds began shorting the shares and asset-backed debt of companies involved with subprime mortgages in October 2006. But about 20% to 30% of their gains last year came from buying stocks of financial companies, primarily in India and Europe, Eisman said.
C-Bass specialized in buying distressed home loans, known as "scratch-and-dent," and then securitizing them while retaining servicing rights and some high-risk tranches. One of its units, Fieldstone Mortgage Co., filed for bankruptcy in November nine months after it was acquired by C-Bass. The company, the bulk of which is owned by mortgage insurers MGIC and Radian Group, last month sold its Litton Loan Servicing unit to Goldman Sachs Group for an undisclosed price.
Morgan Stanley bought FrontPoint in November 2006 for about $400 million. The company is a collection of individual hedge funds whose managers split fees with the firm in return for help in fund-raising, bookkeeping and other services.
