The Third Fall of Victor Niederhoffer

There are a few real characters in finance, and Victor Niederhoffer is one of the most compelling. An inveterate and compulsive speculator, he does fabulously well until he blows up – again and again and again. John Cassidy started profiling him this summer, before the latest bout of market volatility, and he now serves up a pretty definitive 11,000-word profile in this week's New Yorker.

It's worth noting that Niederhoffer is not important, from a capital-markets point of view. While he was being profiled by Cassidy, his hedge funds managed at most a few hundred million dollars, most of them his own. But what he lacks in size he makes up for in ego and in sheer color: Cassidy doesn't neglect to delve into Niederhoffer's personal life, which includes weekly commutes between his wife, in Connecticut, and his mistress, in New York.

Cassidy's timing was perfect: he had front-row seats for the transformation of Niederhoffer's hubris into nemesis. He was there for the this-time-it's-different:

As Niederhoffer and his funds prospered, it appeared to many of his old friends and colleagues that he had finally become a master speculator. “It is impossible to go through what Victor went through without it altering what you do,” Paul DeRosa told me in July. “It made him more conscious of risk, more attuned to it. It was an expensive education, but the important thing is that it wasn’t wasted.” Irving Redel, a former gold and silver trader and chairman of the New York Commodities Exchange, who was a mentor to Niederhoffer in his Wall Street days, said, “To be a great trader you need discipline. You have to have certain strategies that you follow, but you also have to have the flexibility to know when it is going wrong. And you have to know to never go beyond what you can afford to lose.” I asked Redel whether Niederhoffer has these qualities. He replied, “He does now.”

And he was there at the bitter end:

In September, he was forced to close two of his funds, including his flagship, Matador, which had declined in value by more than seventy-five per cent. After cashing out many of his investments, Niederhoffer repaid his lenders and returned what money was leftover to his clients. He laid off several employees and consulted with his lawyers. Meanwhile, rumors circulated on the Internet that, for the second time in a decade, his funds had “blown up.”

Cashing out investors in your flagship fund after it plunges by more than 75%? Yes, I'd say that counts as a blow-up.

Niederhoffer will always trade, of course: it's in his blood. But if Niederhoffer can't successfully predict short-term market moves, then I think it's fair to say that nobody can. It's a pity, though: I like the idea of stock-market speculation as a subset of musicology.

Niederhoffer doesn’t claim to be able to say what the Dow or the S. & P. 500 will do next week or next month, but he believes that over shorter periods—hours or days—there are sometimes predictable patterns that can be exploited. In “The Education of a Speculator,” he devotes an entire chapter to this notion, comparing the market’s movements to some of his favorite pieces of classical music, and juxtaposing pages of sheet music with stock charts. “When the markets are moving in my favor in a nice, gentle way—never below my initial price—I often think of the ‘Trout Quintet,’ ” he writes. “Another frequent work I hear in the market is Haydn’s Symphony No. 94. . . . Right after lunch, or before a holiday, the markets have a tendency to meander up and down in a five-point range above and below the opening. The pattern is similar to the twinkling C-major fifths of Haydn’s symphony.”

Update: A correspondent tells me, quite rightly, that this blog entry should be called "The Second Fall of Victor Niederhoffer", not the third. His really spectacular blowups were in 1997 and 2007; there was no other.