Strike Two for Niederhoffer

by StockJockey

Monday, October 08, 2007 - 11:47 am

Smart people populate all corners of Wall Street. Victor Niederhoffer might be one of the smartest of them all, but even his genius fails once every decade. Apparently he was another victim of the market’s turbulence, which has aged us all over the past few months.

Leverage can kill, and Victor used it in spades…

For a trader like Niederhoffer, who uses leverage—borrowed money—to scale up his bets, the ability to predict even relatively small changes in the market can pay off handsomely. The New Yorker

Handsome would not be a term used to describe Victor’s summer of 2007.

Niederhoffer, a child mathematics prodigy who holds a doctorate in economics, was still working his valued computer formulas earlier this year. He believes markets don’t act randomly and that their swings can be predicted. Now, they were telling him it would be smooth sailing with little volatility.

Then the incredible 100-point plus swings of July and august hit and Niederhoffer left himself without a safety net of cash. When the market dived and the investor was asked to double the amount of capital supporting his highly leveraged positions, he couldn’t come up with the cash.

The funds were forced to close. New York Post

Victor might not be the first, or last prodigy to crash and burn on Wall Street.

But not everyone gets a second chance. Will he get a third?

We had admired Victor for dusting himself off and starting over after the debacle of the Thai Baht crisis. His hedge fund blowup was one of the first to attract the media’s gaze, and perhaps the third time will be the charm. Perhaps his primer broker pulled the plug again at an inopportune time, but we have to ask.

Why would you put yourself in this position again, Victor?

You might have time to read the New Yorker’s 12-page piece on a slow holiday trading day, and draw your own conclusions and lessons. But if you are pressed for time, this says it all:

“I was caught wrong-footed in the market turbulence,” said Niederhoffer, whose $350 million of assets under management was puny compared to the multi-billion dollar blow-ups down the Street. “We were prepared for many different contingencies, but this kind of one we were not prepared for.”

Victor Hit Again
New York Post

The Blow Up Artist
The New Yorker
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Comments:

Douglas Roberts Dimick, J.D.

Foreign Expert
Technology and Economics
Certified, Hubei Province, PRC
AmShell Ltd.

Upon nearly a year of reflection since your article, perhaps the question does not related to if or why but “when”—does he reform the lines and attack (see Jim Sogi article at his web site, Daily Speculations).

Although I study his work from a far (presently in Shenzhen, China), I do not know the man—wish I could work with him, though, on my securities market automated relativity trading (or SMART) program trading and portfolio management system.

See article: http://seekingalpha.com/article/48689-a-paradigm-shift-for-hedge-funds

By way of a caveat, I am quite the opposite of him. He appears to be quantitative based in his applications; I am rule based. That said…

I am reminded of the movie, Pi. Theories concerning analysis and distinguishing order and chaos, random and that being possible as well as systemic and that being probable. Where does study and performance separate relative to human inquiry and human endeavor?

Given the theme of your article last year as well as the current state(s) of world capital markets, perhaps you may consider an inquiry into whether standards and practices (such as those assumed or subsumed with program trading dynamics) reflect a single methodology in terms of design and application?

For the man in your article, perhaps what is most note worthy is the transparency of his intellectual study relative those “multi-billion dollar blow-ups” so realized from “black box” results of industry practices.

I noticed a commentary at his site which references three precepts of Mushashi:
Attack.
Retreat.
Attack while retreating.

Having briefly studied Shaolin, I find that linear and circular applications may define as well as redefine such human applications.

When does what appears to be a retreat become realized as an attack?

Is it the man or the market(s) that tell us so?

You might ask him…

D. R. Dimick

Posted by on 07/31/2008 at 11:40 PM

Hi,

Here is a cleaned version of my post. Sorry, just saw what was originally sent.

I am in China, which means somethings are sent inadvertently and all things are read by the government with a certainty.

Douglas Roberts Dimick, J.D.

Foreign Expert
Technology and Economics
Certified, Hubei Province, PRC
AmShell Ltd.

Upon nearly a year of reflection since your article, perhaps the question does not relate to if or why but “when”—when does he reform the lines and attack (see Jim Sogi article at his web site, Daily Speculations).

See article: http://seekingalpha.com/article/48689-a-paradigm-shift-for-hedge-funds

By way of a caveat, I am quite the opposite of him. He appears to be quantitative based in his applications; I am rule based. That said…

I am reminded of the movie, Pi. Theories concerning analysis of and distinguishing order and chaos: are we actually merely objectifying random as being possible with that which is systemic as being probable. Where does study and performance separate relative to human inquiry and human endeavor?

For the man in your article, what I find most noteworthy is the transparency of his intellectual study relative those “multi-billion dollar blow-ups” so realized from “black box” results of industry practices.

I noticed a commentary at his site which references three precepts of Mushashi:
Attack.
Retreat.
Attack while retreating.

Having briefly studied Shaolin, I find that linear and circular applications may define as well as redefine such human applications. So, the questions becomes…

When does what appears to be a retreat become realized as an attack?

Is it the man or the market(s) that tell us so?

You might ask him…

D. R. Dimick

Posted by on 08/01/2008 at 08:14 AM