Niederhoffer was born in New York in 1943. After studying at Harvard and doing postgraduate studies at the University of Chicago, he became a finance professor at the University of California Berkeley. He left academia to set up a firm that sold privately run companies to public firms, and in 1980 formed his own fund, NCZ Commodities.
He then worked for George Soros's Quantum fund for eight years before striking out on his own again with Niederhoffer Investments and Niederhoffer International Markets, which ran until 1997. He made a comeback with hedge fund Matador, which ran until 2007.
What was his strategy?
In the late 1960s, many academics believed in the efficient market hypothesis, ie, that stock and asset prices embody all available information, making it impossible to beat the market. Niederhoffer set out to disprove the theory by finding evidence of market anomalies, such as the fact that stockmarket returns tend to be higher on certain days of the week. Most of his time was spent devising and testing systems, which he did with large amounts of borrowed money to boost his returns.
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Did this work?
Niederhoffer's career was characterised by long periods of success followed by dramatic collapses. After making $5m in the market on his own, he had a successful career with Soros. Initially, his investment funds would do even better, but they suffered crippling losses in the 1997 Asian financial crisis, forcing him to return the remaining money to investors. From 2002 to 2006, Matador returned nearly 50% a year. However, it exploded during the early stages of the 2007-9 financial crisis.
What was his best trade?
Niederhoffer made a series of bets in 1979, believing that rising inflation would lead to interest-rate rises and drive down bond prices. He sold US Treasury bonds and aggressively bought gold and silver. He turned an initial $50,000 stake into $10m by early 1980 ($32.6m in 2014 prices). However, the value of his portfolio plunged to $5m before he liquidated it.
What can we learn from Niederhoffer?
His rigorous data analysis and willingness to investigate any relationship that might give him an edge made him one of the first Wall Street "quants" traders who use statistics to produce very large returns. However, his two meltdowns demonstrate how using large amounts of leverage can lead to catastrophic losses, especially when markets turn out to be more volatile than history would imply.
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