Morgan Stanley is mulling an exit from London-based hedge fund Lansdowne Partners LLP amid regulatory pressure to prune ownership in risky assets.

Citing people familiar with the developments, The Wall Street Journal reports Morgan Stanley bankers have narrowed the list of potential buyers after earlier approaching a larger group to determine their level of interest in a piece of the hedge-fund firm.

Morgan Stanley Looks To Exit Lansdowne [REPORT]

Morgan Stanley looks to offload 19% stake in Lansdowne

According to The Wall Street Journal report, Morgan Stanley is aiming to sell its 19% stake in the $17.5 billion Lansdowne, thereby joining a wave of banks that bought into hedge funds before the financial crisis and are now backing away because of regulatory pressure to simplify their businesses. Regulators moves to impose new limits on ownership of relatively risky assets likely played a role in Morgan Stanley’s decision to prune its stake in Lansdowne.

New York-based Morgan Stanley’s push into hedge funds has had mixed results. During its former Chief Executive John Mack’s tenure, the investment bank went on a hedge-fund buying spree in 2006, acquiring FrontPoint Partners LLC that year and minority stakes in Avenue Capital Group, Lansdowne and Traxis Partners in 2006 and 2007.

Morgan Stanley’s stake in Lansdowne doesn’t offer a seat on the hedge fund’s board or management committee.

In 2011, FrontPoint faced trouble as its former manager was convicted for securities fraud and obstructing a Securities and Exchange Commission probe. Eisman departed FrontPoint Partners in 2011 amid investor withdrawals following charges that Joseph F. “Chip” Skowron, a co-manager of the firm’s health-care portfolio, traded on insider information. FrontPoint was later shut down.

In 2012, following the death of its legendary founder Barton Biggs, Traxis Partners was closed down.

Regulatory restrictions

Before the financial crisis, banks were eager to acquire hedge-fund stakes, as it was considered a lucrative new business. However, the crisis shrank the assets under management of many hedge-fund firms. Moreover, the recent Volcker rule, which limits how much of their own capital banks can have in riskier investments such as hedge funds and private-equity funds, has thrown a wrench into their plans.

The Volcker Rule, a centerpiece of the 2010 Dodd-Frank financial-overhaul legislation, was approved by government agencies in 2013. The rule prohibits banks from owning more than 3% of a hedge fund or private equity portfolio.

J.P. Morgan has been reported to be in discussions for months to possibly sell part of Highbridge Capital Management LLC to its management team. The estate of Lehman Brothers Holdings has also been trying to sell its 20% stake in the D.E. Shaw Group, while Deutsche Bank AG has agreed in principle to sell its 17.5% stake in Arrowgrass Capital Partners LLP to Foundation, and Zurich-based insurer Swiss Re is trying to sell its stake in hedge-fund giant Brevan Howard Asset Management LLP.

Lansdowne has witnessed significant change receently with its co-founders retiring in 2013 and 2014, as well as some other changes in the management of the firm and responsibilities of key personnel. Morgan Stanley has fared well with Lansdowne investment, which at $17.5 billion is near its peak size despite some recent stumbles in its smaller funds.