`Whatever Voodoo He Uses, It Works'
To many in the somewhat esoteric business of trading commodities, Victor Niederhoffer is regarded as, well, eccentric. The words "odd" and "bizarre" even come up occasionally.
Take the National Enquirer: For Niederhoffer, it's a research tool. "The only newspaper I read," he claims. Want to know where soybean prices are going? On the same repetitious course as the Moonlight Sonata, says Niederhoffer, who bases at least part of his trading on the relationship between commodity price movements and Beethoven's musical scores. As for easy pickings in the marketplace, watch for a "LoBagola." That's the trading pattern Niederhoffer named after an African writer who noticed how elephants trampling a village exit by the same path they entered--like panicky speculators in fast-moving markets.
RIPPLES. If Niederhoffer's theories are off the wall, he does a very good job of compensating. Niederhoffer Investments Inc. has compiled an unusually long, successful track record for a futures-fund manager--a 32% compound annual return since 1982. Now, he's planning to expand his public funds well beyond their present level of $125 million.
Although Niederhoffer peruses the National Enquirer for insights into investor sentiment, he also uses less provocative trading methods. Niederhoffer makes money by finding small anomalies in the day-to-day ripples of markets for everything from currencies to coffee. He uses a statistical model to reveal how movement in one market might influence another, such as sugar affecting the price of soybeans.
Most important, Niederhoffer is an inveterate contrarian. He feeds off panic, making short-term bets when prices get frothy. He condemns the common strategy of trend-following, which helped make his buddy George Soros super-rich. "A delusion," he declares. Trying to read the future in chart patterns doesn't work, either. "Deception," he insists. And when forces outside the natural order intervene in the markets, watch out. "I think of governments as if they're run by a professional criminal class, taking from one set of pockets and putting into another," he says.
The 53-year-old trader came by his unusual theories via a blue-chip education: squash champ at Harvard, finance doctorate at the University of Chicago, and an assistant professorship at the University of California at Berkeley. His transition to full-time trader is chronicled in a new autobiography, The Education of a Speculator. "By paying attention to the little things, the nitty-gritty, the humdrum things in life," he says, "you become a great speculator."
Soros pegged him as a winner early on. Their business ties grew into friendship in 1985, when Niederhoffer, who felt he was hitting a bad stretch, voluntarily returned the financier's money with a healthy profit. He did the same in 1995. "Very unusual for a fund manager," notes Soros. "It basically shows his integrity."
BLOWOUT? While nearly three-fourths of his trades make money, Niederhoffer says, the rest can be brutal: When the yen soared in March, 1995, he was down as much as 35%. Some industry pros believe Niederhoffer's contrarian style puts him at risk of a blowout. "It's a matter of time before something goes wrong," warns Frank J. Franiak of Monroe Capital in Chicago. Yet Niederhoffer has shown a knack for rebounding from losses. "Whatever voodoo he uses, it works," marvels Timothy P. Horne, chairman of Watts Industries Inc. and a customer since 1982.
One example happened on Dec. 13. When the Standard & Poor's 500-stock index was moving against his big options position, Niederhoffer dashed out of the trading room in his sprawling Connecticut home. He trotted through hallways crammed floor to ceiling with art, past the indoor squash court, seashell display, and library of classic first editions, out the door and into the chilly drizzle for a jog. "Sometimes, looking at a screen doesn't help you," he explains. Down $14 million when he took his jog, Niederhoffer stayed with the trade and eventually made $5 million. Odd? So what?