The fall of FrontPoint

September 01, 2011   Lawrence Delevingne

An insider trading debacle has brought the firm to its knees, but its highly touted model showed flaws from the start.

  
  Portfolio manager Joseph "Chip" Skowron
Illustration by Andrea Ventura
When Phil Duff, Gil Caffray and Paul Ghaffari launched FrontPoint Partners in November 2000, they hoped to create a hedge fund firm so diversified it would be impervious to a single manager's blowup and so well-managed it could track every trade for undue risk. The trio had witnessed dizzying falls at their former elite firms-Tiger Management and Soros Fund Management-and fashioned an institutional investor-friendly platform they thought could manage $25 billion or more using dozens of teams. To do so, the men designed a compensation scheme to encourage collaboration and tamp down egos.

It didn't work out that way.

Almost from the beginning, internal battles were legend. Managers screamed to keep more of their profits after one big year, while management tried to keep a larger stake for the firm. Duff had long wanted...

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