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. â€œThe market was not as liquid as I anticipated,â€ he
said. â€œThe 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.â€ Niederhoffer was still trading for his own
account, and for some remaining clients. â€œMy basic ideas about the
creative power of the market, buying in panics, buying on weaknessâ€”I
donâ€™t think what has happened has anything to do with that stuff,â€ he
said. â€œI am going to keep going, for better or worse.â€