GLOBAL INVESTING: Renaissance man's nine lives

By Lauren Foster
Financial Times; May 01, 2003

Victor Niederhoffer must have nine lives.

The illustrious speculator was nearly ruined in the 1987 stock market crash but bounced back and several years later was named the world's top hedge fund manager. He went on to write a best-selling autobiography, Education of a Speculator.

Then, in August 1997, Mr Niederhoffer lost $50m, almost half his funds under management, after taking a mistakenly bullish stance on Thailand. He recovered slightly but was forced to close two months later after a disastrous bet on the S&P 500 index wiped out his fund.

He is again back in business, now trading his own account and managing money for overseas clients. His second book, Practical Speculation, co-authored with Laurel Kenner, recently hit the bookstores.

While one cannot judge a book by its cover, as the saying goes, this cover does reveal something of the character and eclectic interests of its author, a Harvard-educated scholar with a PhD in statistics and economics from the University of Chicago.

The montage of personal effects from his home in Connecticut includes a painting of Sir Francis Galton, cousin of Charles Darwin, inventor of fingerprint identification and, according to Mr Niederhoffer, "one of the greatest geniuses that has ever graced the world".

Another painting details Sir Ernest Shackleton's 1914 voyage to the Antarctic and the tale of survival after his ship Endurance became trapped in sea ice.

The themes of hardship, risk and survival constantly crop up. Before his coup de grâce in 1997, Mr Niederhoffer had risen from a working-class background in Brooklyn to be a highly successful hedge fund manager.

At the peak of his career, he managed about $130m and his returns - running at about 30 per cent a year for more than a decade - put him in the top 20 per cent of future traders. Business Week named him America's best commodities fund manager in 1994.

Mr Niederhoffer started trading futures more than 20 years ago after running a mergers and acquisition company that he founded in 1965.

He is regarded by his peers as a brilliant iconoclast and something of a modern day Renaissance Man, an image he has also nurtured.

The 59-year-old libertarian is both an avid reader and a collector of old books. Two of his favourite titles - Ayn Rand's Atlas Shrugged and Herman Melville's Moby Dick - are on the cover.

He also collects seashells, among other things, and says the ocean "is sort of like the market. It is completely unfathomable and it's constantly changing. And it's very much the kind of thing that you have to guard against sudden disaster".

Looking back over his own personal disasters, he admits he made a lot of mistakes. After his financial ruin he was forced to sell his famed silver collection, an act he calls "a just punishment".

He did save one piece, the Manchester Cup, given to the winner of the Steeple Chase in Manchester, England, in 1904. It is now the mascot for Manchester Trading, which he formed in 1998.

The five-time US squash champion, who works out daily, quips he returned to speculating because he could not get a job as an assistant squash coach as the game had changed. He started a new hedge fund early last year. "Strangely enough, there were some people that were inclined to give me a second chance," he said.

The fund is "a combination of a strategic and tactical leveraged fund" and its strategy is "to take advantage of the unholy avoidance of risk that people are so prone to after a series of bad years," he said. "I provide insurance to those who are fearful of the Dow dropping 50 per cent the way it did in 1930".

He believes investors today resemble the victims in Jack Finney's science fiction novel, Invasion of the Body Snatchers: passive and fearful.

"The body snatchers have the public in its grip and they have everybody afraid to take risk," he said.

For Mr Niederhoffer, taking risk is key. "I don't know how to make money without taking the kind of risk that would be disastrous for many people to consider." But he hastened to add: "No one should think I have anything near a Holy Grail."

Mr Niederhoffer focuses strictly on stock markets around the world and stays clear of bonds and foreign exchange. "The currency markets are too smart for me. No matter which way I go, they go the opposite way. Same thing for the bond market."

He disdains hedged strategies. "The worst thing of all is the fund of funds," he said.

Mr Niederhoffer is also staying well away from emerging markets. "I've learnt my lesson," he said. "I won't even go within a block of a Thai restaurant."

When it comes to the subject of the US markets, however, he has plenty to say. He admits the book has "very heretical thoughts", which is not surprising for a trader famed for his contrarian approach.

One such thought is that Warren Buffet does not have a message for our times.

Mr Niederhoffer cites the influential investor's comment that had he been at Kitty Hawk in 1903, he would have shot down Orville Wright as a service to capitalists.

"Is he mad? Or am I mad?" he writes. "Has not air transport vastly improved travel and commerce? Is not aerospace the largest US export industry? Yet here was the most admired capitalist in the world, telling people that investing in innovative industries does not pay off."