Trader’s Narrative

Victor Niederhoffer’s Matador Fund lost almost a third of its assets in May. If you know about Vic’s history this isn’t that surprising. The timing is interesting as he was just emerging from the shadow of his spectacular blow up in 1997 with great performance in his fund, a feature article in Bloomberg magazine and honors from his peers.

Apparently he was massively leveraged on the long side into the slide (he perennially prefers the long side). It turns out that after all he still hasn’t learned humility (or risk management). The stock market is a wonderful teacher, but a very expensive one.

Consider what he said at the MARhedge party in April:

“The ridiculous thing, in all candor, is that I think I’ve had the greatest run of success in the history of speculation,”

Such extravagant and meaningless exaggeration is signature Niederhoffer.

Unless he can pull a rabbit of out of his proverbial hat, he’s going to go down in flames again. A drop of 30% means he has to earn 50% just to come back to where he was. Can he do it? Yes, it’s possible. But will his investors stick with him through such volatility? I doubt it. Most hedge funds, in fact, close up when faced with the task of climbing such a trough because even if they accomplish it (due to the high watermark) they’re not getting paid for that performance.

Here is a relevant excerpt from a recent Bloomberg article:

“I’m really humble about my ignorance,'’ says Jim Leitner of Falcon Management Corp., who estimates he’s made more than $2 billion for investors and employers in his trading career. “Many traders I’ve met over the years approach the market as if they’re smarter than other people. I have found this approach eventually leads to disaster when the market proves them wrong.'’

Indeed.