Hedge Funds: The Life and Losses of Victor Niederhoffer

There is a must-read John Cassidy piece in the current New Yorker on hedge fund manager and trader Victor Niederhoffer. It follows his career, and chronicles how excess leverage helped cause him to blow up (again) this summer, with two of his four funds being closed.

The lessons, of course, are broader than simply “Beware of leverage”, and they are applicable to more people than commodities futures traders. It gets to the heart of risk, reward, and ruin, and what it means to be an entrepreneur, financial or otherwise.

Had he been able to wait a little longer before liquidating his trades,
his funds might have recouped most of the losses. After the Federal
Reserve cut interest rates again, on September 18th, the stock market
rallied further and volatility decreased. Still, Niederhoffer sounded
philosophical. “The market was not as liquid as I anticipated,” he
said. “The movements in volatility were greater than I had anticipated.
We were prepared for many different contingencies, but this kind of one
we were not prepared for.” Niederhoffer was still trading for his own
account, and for some remaining clients. “My basic ideas about the
creative power of the market, buying in panics, buying on weakness—I
don’t think what has happened has anything to do with that stuff,” he
said. “I am going to keep going, for better or worse.”


  1. Y’know, the more of this stuff I see, the more I become convinced that it basically all comes down to that being out on the high end of the risk/reward curve carries correspondingly high cognitive illusion phenomena.
    In the same way that throwing darts beats most professional stock managers, doing some sort of leveraged collection of index funds to push the return would probably beat most hedge-fund managers. Maybe there’s an unmet market niche there :-).

  2. Seth,
    I think Rydex has a number of leveraged ETFs, you might want to check them out.

  3. Finkelstein could be right…we feature free practice accounts for commodity futures trading for those who want to get a feel for what the leverage is like or simply practice and test strategies–Patrick Kerr

  4. @Seth — you are correct (2nd paragraph; I didn’t really understand your first paragraph). As long as you keep the leverage “lowish”. But can you stick with it during down markets? Who knows. Thing is, if you don’t leverage at all, you will beat most people over long periods of time, so why be greedy? :-)

    Also, you could have called the top in “Niederhoffer futures” when they wrote that book about him (I think in the 90’s) — this was before the first big blowup, and it talked about the national enquirer in the office, and sandals at work (new idea at the time), and so forth.

  5. Roger Bigod says:

    There’s an interview with Taleb in which he talks about working for Niederhoffer and his extreme philosophical disagreement with the guy. In his view, Neiderhoffer makes money by essentially selling otm options, failing to take into account the fat tails of the probability curve. This works fine and a long time, but blows up eventually. It’s like writing hurricane insurance for New Orleans with inadequate premiums. For 40 years or so, that would have been a wonderful business.
    Leverage just magnifies the problem when the bills come due, if Taleb’s view is correct.

  6. @5: that’s a malcolm gladwell article which you can find here:

  7. @dub dub – What I meant is that these guys aren’t doing anything extra-special to generate the high return, it’s just that they’re taking on very high risk. It’s the “never confuse genius with a rising market” proverb with a vengeance. But they’re able to sell that (pun unintended) by using the psychological tendency to overweight gains as opposed to losses. But the same sort of characteristics likely could be had (heck, probably better ones) by just doing a diversified basket of ordinary higher-risk index investments.
    Maybe the best argument for certain inefficiencies and psychological effects, is that they seem to be selling a bad product for a ridiculous price.

  8. Josh Stern says:

    Most books on trading start with comments to the effect that discipline in controlling losses is perhaps the most important aspect of trading. There’s room for a lot of disagreement about the nature of that discipline, but it sounds like Niederhoffer is smart enough and then some to figure out a workable discipline, but has personality traits that cause him not to stick to it. Guys like that should work with a senior partner who has veto power over major portfolio decisions.