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Niederhoffer encounters a second black swan
October 12, 2007
The New Yorker this week has a fascinating piece on the second downfall of Victor Niederhoffer, the hedge fund manager and self-proclaimed "speculator".
John Cassidy, the writer, started work when Mr Niederhoffer was an intriguing character who had come to grief in the Thai financial crisis but appeared to have recovered his reputation and learned from bitter experience.
Then came the summer of 2007 and Cassidy’s subject fell apart again (financially, if not emotionally) in front of him. Mr Niederhoffer had to close his flagship hedge fund because of huge losses it suffered in the extreme market conditions.
The good news is that Mr Niederhoffer, who apparently was driven into depression by his last market fiasco, seems to be phlegmatic this time.
But it reinforces the point that extreme market conditions occur more often than people - or financial models - tend to predict. This is the argument popularised by Nassim Nicholas Taleb in his books Fooled by Randomness and The Black Swan.
In Mr Niederhoffer’s case, he got into extreme trouble when margin calls on his positions were raised to the point when he had to sell assets. As we now know, Morgan Stanley’s traders, who are also fairly sophisticated, lost $390m in a single day in August.
It is extraordinary, however, to read how even a speculator who had learned his lesson painfully before fell into the trap again.
