Annals of Finance

The Blow-Up Artist

Can Victor Niederhoffer survive another market crisis?
b !ohn Cassid "ctober #$% &''(

On a wall opposite Victor Niederhoffers desk is a large painting of the Essex, a Nantucket whaling ship that sank in the South Pacific in 182 , after !eing attacked !" a giant sper# whale, and that later ser$ed as the inspiration for %&o!"'(ick)* +he Essexs captain, ,eorge Pollard, -r), sur$i$ed, and persuaded his financial !ackers to gi$e hi# another ship, !ut he sailed it for little #ore than a "ear !efore it foundered on a coral reef) Pollard was ruined, and he ended his da"s as a night watch#an) +he painting, which Niederhoffer, a sixt"'three'"ear'old hedge'fund #anager, ac.uired after losing all his clients #one"/and a good deal of his own/in the +hai stock #arket crash of 1001, ser$es as an ad#onition against the incaution to which he, a notorious risktaker, is prone, and as a re#inder of the precariousness of his success) Niederhoffer has !een a professional in$estor for nearl" three decades, during which he has #ade and lost se$eral fortunes/t"picall" !" rel"ing on #ethods that other traders

consider reckless or unorthodox or !oth) 2n the nineteen'se$enties, he wrote one of the first software progra#s to identif" profita!le trades) 2n the earl" eighties, he went into !usiness with ,eorge Soros, then argua!l" the worlds #ost successful in$estor) 3 few "ears later, when pro#inent #one" #anagers were !ased al#ost exclusi$el" in &anhattan, Niederhoffer #o$ed his ho#e and his trading roo# to 4onnecticut, to a twent"'thousand's.uare'foot neo'+udor #ansion cra##ed with !ooks, #anuscripts, sil$er 5ewelr", art work, and a collection of seashells) +he walls of his $ast li$ing roo#, which has a ceiling a!out thirt" feet high, are co$ered with #ore than two do6en paintings, #an" depicting industrial landscapes or 7estern shoot'e#'ups, and the floor is occupied !", a#ong other o!5ects, a large painted pon", a !lack'spotted wooden hound carr"ing three .uail on its !ack, a seated pig, and two #iniature !lack !ears) Niederhoffers ho#e is also fre.uentl" occupied !" $arious of his children) 89e has six daughters and an infant son, fro# two #arriages and an extra#arital relationship): 3fter the 1001 3sian financial crisis, Niederhoffer was forced out of !usiness for se$eral "ears) +hen, in his late fifties, he #ade a dra#atic reco$er") 9e founded three new hedge funds and launched a 7e! site, (ail"Speculations)co#, where he posts his idios"ncratic insights into the stock #arket/%7hat can we learn fro# shelled species a!out the #arkets;* he wrote in &a"/as well as opinions a!out sports, politics, and culture 8% <+he =antasticks, currentl" running as a re$i$al on >roadwa", is the perfect #usical*:) 9e has #entored do6ens of successful traders, #an" of who# regard hi# as a guru) %>efore 2 5oined Victor, 2 used to trade for a 7all Street fir#,* -a#es ?acke", a self' e#plo"ed =lorida in$estor who placed trades for Niederhoffer fro# 2 2 to 2 @, told #e) %>ut 2 .uickl" reali6ed that 2 didnt know $er" #uch) 7hat he taught #e was how to approach the #arket as a whole, and how to anal"6e it scientificall") 9e was 5ust a#a6ing at seeing what was happening and showing us how to #ake #one")* Niederhoffer, a for#er national s.uash cha#pion who is considered one of the #ost talented 3#ericans to ha$e pla"ed the ga#e, relishes the acclai#, !ut he knows that in his field circu#stances can change .uickl") >" the end of 3ugust, his funds were in trou!le, and on 7all Street ru#ors circulated that he would soon !e out of !usiness again) Niederhoffer had !een worried all su##er, !ut he tried to pro5ect a wr", self' deprecating hu#or) %2f an e$ent like 1001 occurred again, #" dependents would !e up the creek, and 2 would !e a night watch#an so#ewhere, 5ust like 4aptain Pollard,* he said to #e when 2 $isited hi# at his ho#e one #orning in -une) %2n 3#erica, the" gi$e "ou a second chance !ut not a third)* +all and tri# 8he still looks like an athlete:, with closel" cropped white hair, oli$e skin, and a long, expressi$e face, Niederhoffer speaks softl", with a strong >rookl"n accent) 9e was wearing a "ellow shirt, pink trousers, and white socks, !ut no shoes/he #aintains a %no shoes* rule in the office, to reduce noise/and was sitting !ehind his desk, which is do#inated !" two >loo#!erg screens, in a large roo# o$er the garage which he shares with his partner, Ste$e 7isdo#, and se$eral #e#!ers of his co#pan", &anchester +rading) 8+he trading operation fits into two roo#sA the other one is o$er the kitchen): 2n one hand, he was holding a telephone recei$er, and his light'!lue e"es were fixed on the co#puter screens) %+he #arkets wa" down toda",* he said !" wa" of

greeting) +urning !ack to the telephone and addressing his !roker at the 4hicago &ercantile Exchange, he asked, %4an "ou repeat those .uotes, please;* 3fter a few seconds, he said, %2ll sell two hundred red &arch at fi$e hundred and ten) 2ll sell two hundred !lue &arch at ele$en ten)* +he 4hicago &erc is a futures #arket, where people trade contracts that gi$e the# the right to purchase a particular co##odit" at a specified date in the future) Originall", the ite#s traded on the exchange were ph"sical co##odities, such as eggs, !utter, and pigs, and its #ain custo#ers were far#ers and food co#panies) 2n recent decades, futures trading has !eco#e #ore a!stractA professional speculators now use the exchange to place !ets on the prices of financial securities, such as stocks, !onds, and currencies/a de$elop#ent that Niederhoffer, a for#er #ath prodig" who has a Ph)() in econo#ics, has exploited) 9e likes to !e at his desk well !efore the 4hicago #arket opens, especiall" on da"s when he has !ig positions riding o$ernight) 9e is #ainl" a short'ter# operator/ he !ets on how prices will #o$e in the su!se.uent few #inutes, hours, or da"s/and #ost of his knowledge of current e$ents co#es fro# >loo#!erg) 89e doesnt read newspapers or watch tele$ision): 7hen he arri$es at his office, he turns on his co#puter and reads a!out de$elop#ents in the 3sian and European #arkets, which often foreshadow the da"s action in the Bnited States) 3t the end of the pre$ious week, the "ield on ten'"ear +reasur" !onds had surged to al#ost fi$e per cent, pro#pting Niederhoffer to turn uncharacteristicall" !earish on stocks) Once the !ond "ield reached fi$e per cent, he had reasoned, so#e in$estors would #o$e their #one" fro# stocks to !onds, which would depress stock prices) 3ccordingl", he had sold short #ore than a !illion dollars worth of stock futures) 8Selling short, a co##on tactic a#ong speculators, in$ol$es selling so#ething "ou dont own with the intention of !u"ing it !ack later, at a cheaper price) 2f the price of the securit" falls while "ou are %short,* "ou #ake a profitA if the price rises, "ou lose #one"): E$en !" Niederhoffers generous standards, going short a !illion dollars of stock futures was a large !et, !ut it worked out well) Not long after the #arkets reopened on &onda", the !ond "ield cli#!ed to fi$e per cent, and stocks and stock futures tu#!led) On 7ednesda", the #orning of #" $isit, shortl" after the opening !ell sounded on 7all Street, Niederhoffer repurchased the futures he had sold, #aking #ore than fi$e #illion dollars) 9e didnt look pleased, though) (uring the #orning, stocks had continued to fall, and he knew that if he had waited he could ha$e #ade an e$en !igger profit) 9e sa"s that in twent"'eight "ears as a professional in$estor he hasnt had a single trul" satisfactor" trading da") 3t ele$en oclock, the (ow -ones 2ndustrial 3$erage had slipped a!out a hundred points and the S) C P) D 2ndex was down a!out thirteen points) Niederhoffer stared #orosel" at his >loo#!erg screens) %+he score doesnt look good,* he #uttered) +he screens were tracking the #o$e#ents of $arious stock'#arket indices in Europe and ?atin 3#erica, !ut 2 noticed that the" werent displa"ing an" 3#erican prices) Niederhoffer used to in$est hea$il" o$erseas, !ut since his 1001 #isad$enture in +hai stocks he has confined his trading to the Bnited States) 9e explained that when the B)S)

#arket was falling he preferred to track the (3E, a ,er#an stock index that generall" #o$es in s"nch with the 3#erican #arket) %Fou can see how #uch "ou are losing, !ut it doesnt hurt as #uch as watching the S) C P),* he said) >efore long, Niederhoffer cheered up a !it) %+here ha$e !een three !ig down opens in a row, which is unusual,* he said) %+he #arket doesnt like to do the sa#e things repeatedl")* 9e turned to 3lex 4astaldo, a thin, !espectacled fift"'three'"ear'old 2talian who has a degree in electrical engineering fro# &)2)+) and a Ph)() in finance fro# 4BNF, and asked hi# to co#pile so#e data) %(oc,* he said to 4astaldo, %what does the #arket do when it opens down a lot three da"s in a row;* 3 few #inutes later, 4astaldo handed Niederhoffer a co#puter printout, which showed that since the start of 2 G there had !een 5ust ten occasions on which, for three consecuti$e da"s, the S) C P) D had fallen sharpl" in the first hour and a half of trading) On eight of those occasions, stocks had !ounced !ack, with the a$erage #arket rise !" the end of the following trading da" a#ounting to three tenths of one per cent) =or a trader like Niederhoffer, who uses le$erage/!orrowed #one"/to scale up his !ets, the a!ilit" to predict e$en relati$el" s#all changes in the #arket can pa" off handso#el") +he software that Niederhoffer uses to identif" stock'price patterns is a $ersion of the code that he wrote thirt" "ears ago) &an" hedge funds and 7all Street !anks now rel" on such progra#s to spot potentiall" lucrati$e #arket fluctuations and place orders auto#aticall"/a practice known as %!lack !ox* in$esting/!ut Niederhoffer is scornful of this #ethod) 3lthough #arkets so#eti#es #o$e in predicta!le wa"s, he sa"s, the patterns change constantl", and reliance on #athe#atical algorith#s can !e disastrous) 3t &anchester +rading, Niederhoffer or 7isdo# re$iews each trade !efore it is placed) 2n this instance, Niederhoffer expected the #arket to re!ound, !ut he decided to hold off on !u"ing) &organ Stanle" had 5ust issued a notice ad$ising its clients to reduce their stock holdings) %Plus, the =ed has !een #aking !earish noises,* Niederhoffer said) 3 few #inutes earlier, the (ow had dropped !elow thirteen thousand fi$e hundred) 4astaldo went o$er to Niederhoffers >loo#!erg and called up so#e B)S) stock charts) Niederhoffer, looking at the falling lines, announced, %2ts gone down two per cent/ thats enough)* +hen he turned to Owen 7ilson, a "oung English#an who has worked for hi# for a couple of "ears) 9olding a phone to his ear, 7ilson shouted out .uotes fro# the 4hicago &erc) %>u" a hundred and fift" at eighteen se$ent"'fi$e,* Niederhoffer said) 7ilson placed the trades and called out #ore nu#!ers) 3gain, Niederhoffer told hi# to !u") 7ithin a few #inutes, 7ilson had purchased tens of #illions of dollars worth of stock futures) Niederhoffer recei$ed his first lessons in finance as a child growing up in >righton >each) 9e learned to !et on stoop!all, paddle!all, and checkers, which he pla"ed with other local kids, and with adults who went !" nickna#es such as >itter 2r$ing, >ookie, and Ner$ous Phil) 9is father, 3rtie, a New Fork 4it" cop who spent twent" "ears on the force !efore !eco#ing a professor of sociolog" at -ohn -a" 4ollege of 4ri#inal -ustice, tried unsuccessfull" to dissuade hi# fro# ga#!ling) %E$er"thing was a #one" ga#e,* Niederhoffer told #e) %&" father hated it, !ut 2 lo$ed to win a nickel or a di#e)* 7ith

the encourage#ent of his uncle 9owie, who was in high school, he also placed wagers on professional sports) 2n Octo!er, 10D1, on Fo# Hippur, 9owie and Victor, who was eight, sneaked out of s"nagogue and !et eight hundred dollars on the >rookl"n (odgers, who were pla"ing the New Fork ,iants in a pennant'decider) 7hen >o!!" +ho#son hit his fa#ous ho#e run, defeating the (odgers, 9owie and Victor were de$astated) 8+he knowledge that onl" two of the lost dollars were Niederhoffers did little to console hi#): Niederhoffer sa"s that as far !ack as the &iddle 3ges his ancestors were #one" changers) 3t the end of the nineteenth centur", his paternal great'grandparents #o$ed fro# 3ustria to the ?ower East Side, where se$eral of their se$en sons sold fruit fro# a horse and cart) Niederhoffers grandfather &artie, who had a good head for figures, !eca#e an accountant) 2n the !oo# "ears of the nineteen'twenties, &artie !orrowed #one" and in$ested it in real estate and stocks, asse#!ling a portfolio that #ade hi# nearl" a #illionaire) +he stock'#arket crash of Octo!er, 1020, destro"ed #ost of his wealthA two "ears later, the #arket di$ed again, wiping out what he had left) &artie, who spoke Fiddish and pidgin Spanish, got a 5o! as a translator in a >rookl"n courthouse) >ut he retained an interest in the stock #arket, and in 10DI he financed Victors first e.uit" in$est#entJ a hundred shares of the >enguet &ining 4o#pan", which was trading at fift" cents) =or se$eral "ears, the stock hardl" #o$ed) +hen, in 5ust a few #onths, it dou!led in $alue) On &arties ad$ice, Victor sold his shares, and #ade a profit of fift" dollars) (uring the next thirt"'six #onths, the stocks $alue increased to thirt" dollars a share) %2 ha$e repeated the #istake of gra!!ing at s#all profits and selling at a targeted round nu#!er o$er and o$er in #" speculati$e career,* he wrote in %+he Education of a Speculator,* a #e#oir that he pu!lished in 1001) %2 !elie$e #an" others #ake this sa#e error)* 3t the age of six, Niederhoffer sa"s, he was such an acco#plished paddle'tennis pla"er that he had to spot his opponents fifteen points a ga#e) 3t thirteen, he defeated a se$enteen'"ear'old to win the New Fork 4it" 5unior singles tennis cha#pionship) 82n school, his co#petiti$eness elicited #ixed reactions) 3t the end of his last "ear at P)S) 22D, his sixth'grade teacher wrote, %3lthough a little tr"ing at ti#es, "ou were the spark the class needed this "ear) Fou ha$e a keen #indA learn to cur! "our inclinations to de#onstrate superiorit")*: 3t 3!raha# ?incoln 9igh School on Ocean Parkwa", Niederhoffer was the president of his class, the captain of the tennis tea#, the star of the #ath tea#, a pianist in the orchestra, a clarinettist in the !and, the sports editor of the newspaper, and a fre.uent contri!utor to Vanguard, the school #aga6ine) 2n an article that appeared in the -une, 10D8, issue, Niederhoffer warned that auto#ation %will re.uire a co#plete reorientation* in the attitudes of trade unions) =i$e #onths later, displa"ing a $iew of go$ern#ent inter$ention that he would later renounce, he argued that %federal aid to education is i#perati$e if e.ualit" of educational opportunit" in our de#ocrac" is to ha$e real #eaning)* Niederhoffers father, who# he idoli6ed, encouraged his athletic and intellectual pursuits, and his #other, Elaine, who was descended fro# a long line of ra!!is, pressed hi# and his "ounger !rother and sister/now, respecti$el", a co##odit"'fund ad$iser and a

ps"chiatric social worker/to succeed) %&" #other was ne$er content,* Niederhoffer told #e) %She pushed us to !e No) 1)* 2n -anuar", 10@ , at his #others urging, he applied to 9ar$ard) 2n a letter of reco##endation, his acade#ic ad$iser and tennis coach, &ilton 9echt, wrote, %Victor ranks a#ong the first in intellectual achie$e#ent and pro#ise in co#parison with the thousands of students 2 ha$e taught in the last thirt" "ears)* 9ar$ard awarded hi# a partial scholarship, as did 4olu#!ia and the Bni$ersit" of Penns"l$ania) Niederhoffer chose 9ar$ard, where he #a5ored in econo#ics) Niederhoffer spent less ti#e in the classroo# than he did on the s.uash court) Bntil he #o$ed to 4a#!ridge, he had ne$er pla"ed s.uash/or s.uash rac.uets, as it was then called/!ut the ph"sical de#ands of the ga#e appealed to hi#) 9e !orrowed e$er" !ook on s.uash at the 7idener ?i!rar", and took so#e with hi# to the practice court, where he opened the# on the floor and repeatedl" copied the #o$es the" descri!ed) 2n 10@2, as an eighteen'"ear'old sopho#ore, Niederhoffer won the 5unior cha#pionship of the National 2ntercollegiate S.uash Kac.uets 3ssociation) 3 "ear later, he won the 9arr" 4owles tourna#ent, a prestigious co#petition for a#ateurs) %9e has good si6e, .uickness, and a skillful touch,* his 9ar$ard coach, -ack >arna!", told the News and Views of Harvard Sports, a ca#pus pu!lication, in -anuar", 10@G) %>ut a lot of pla"ers ha$e those attri!utes) 7hat he has !e"ond that is one of the #ost co#petiti$e characters 2$e e$er seen) 9e #akes "ou feel like "ou are watching a person of +" 4o!!s cut in action again)* 2n the 10@G'@I season, Niederhoffer, now a senior, was captain of the 9ar$ard s.uash tea#, which went undefeated) 9e also won the indi$idual national collegiate title, and his aggressi$e pla"ing st"le attracted the attention of a reporter at Sports Illustrated, who wrote, %Niederhoffer thinks he is un!eata!le and cla#ors loudl" for 5ustice when his shots go awr") 4onse.uentl", on those rare occasions when he loses a tourna#ent, s.uash lo$ers are delighted)* +he reporter .uoted Niederhoffers fresh#an coach, 4ore" 7"nn, who recalled his for#er students penchant for %hand!alling it*/ph"sicall" !locking his opponents fro# reaching the !all, a tactic that was frowned upon in New England) Niederhoffers #other read the article and consulted a =ifth 3$enue law fir#, 4ohn C ,lickstein, a!out suing Sports Illustrated for li!el) 8On the fir#s ad$ice, she decided not to file a suit): 2n =e!ruar", 10@@, Niederhoffer won the B)S) national a#ateur cha#pionship, the cul#ination of a series of i#portant $ictories) Sports Illustrated and Time sent reporters to these e$ents, and Niederhoffer wasnt pleased with the co$erage) =irst, he wrote to Time, den"ing its clai# that during the national cha#pionship he had offered odds of two'to'one against hi#self) 3n editor replied, defending the #aga6ines reporting as ha$ing !een !ased on %relia!le sources)* Bnsatisfied, Niederhoffer wrote another letter, to a senior executi$e at +i#e'?ife, the parent co#pan" of !oth Time and Sports Illustrated, co#plaining that the articles had %created the i#pression that 2 was a poor !o" fro# >rookl"n who had ad5usted !adl" to the rigors of a social sport)* 3n aura of class and ethnic pre5udice per$aded press accounts of Niederhoffers achie$e#entsA he was widel" $iewed as an ill'#annered upstart fro# the wrong side of

the East Ki$er) +he Times Magazine noted that he was %!uilt wrong for a s.uash pla"erJ not lithe and wir", or e$en tall and gracefull" powerful) 9e is shaped rather like a !lock /fairl" !road in the shoulders, no waist, thick shapeless legs/and his color is sallow, the deep o"ster sallow of a New Fork street creature)* 2n 4hicago, where Niederhoffer #o$ed in 10@I, to attend graduate school, he couldnt find a s.uash clu! that would ad#it hi#) 9e was so offended that for se$eral "ears he ga$e up the ga#e) 3fter he returned to the court, in 1012, he won the national a#ateur cha#pionship four "ears running, an unprecedented feat) 2n -anuar", 101D, in &exico 4it", he won the North 3#erican Open, a #a5or professional tourna#ent, defeating the legendar" Pakistani pla"er Sharif Hhan in four ga#es) 3fterward, Niederhoffer wasnt $er" gracious) %Hhan had a fatal plan/a lack of real toughness,* he told Sports Illustrated) %9es !een winning so long he doesnt know an"#ore what it is to pla" a !attle to the death)* Shortl" after noon, a housekeepers $oice announced o$er an interco#, %Victors lunch is read") (oes he want it;* %No,* Niederhoffer replied) %2 cant eat lunch with the #arket like this)* 9e looked at his screens) %Europe got killed,* he said to no!od" in particular) 9e was still irked !" &organ Stanle"s !earish notice to clients) %2f the !ig !rokerage houses are going to #ake #one" fro# co##issions, the" ha$e to get people selling as well as !u"ing,* he said dis#issi$el") Bnlike #ost 7all Street fir#s, &anchester +rading doesnt ha$e a tele$ision in its trading roo#, partl" !ecause Niederhoffer doesnt want to !e distracted !ut also !ecause he cant a!ide doo#'#ongering #arket co##entators, like 3lan 3!elson, a colu#nist for Barrons, the financial weekl", and Ko!ert Prechter, -r), the pu!lisher of the Elliot Wave T eorist) %+hese people ha$e !een !earish since (ow 1 ,* Niederhoffer said angril") %7hen the #arket is going up, the" cant get a hearing) >ut when the #arket falls the" get in$ited !ack on) +he" sa" its like 1001, or 1081, or 2 2) 9ow a!out 10 1; +hat was a !ad "ear) 2nterest rates went upA the #arket went down !" nearl" fift" per cent)* -ust after one oclock, the #arket hit a new low for the da", with the (ow down a!out a hundred and twent"'fi$e points, and the S) C P) D down a!out fourteen points) 2t is a strange feature of financial #arkets that ti#e occasionall" see#s to speed up) On .uiet da"s, when prices arent #o$ing #uch, traders #onitor their positions, read the papers, and chat with each other, and it can see# as though an eternit" passes !efore the closing !ell sounds) >ut when the #arket !eco#es $olatile e$er" #o$e !rings with it a fresh opportunit" for profit or loss, and each #inute can fl" !") +he #athe#atician >enoLt &andel!rot, who pioneered the application of chaos theor" to financial #arkets, refers to this pheno#enon as the %#ultifractal nature of trading ti#e)* Niederhoffer turned to 4astaldo) %+his da" is far fro# o$er,* he said) %(oc, what happens when the #arket is down twel$e points at one oclock and it has !een down significantl" the pre$ious two da"s;* 3 few #inutes later, 4astaldo handed hi# another co#puter printout) %&ost of the ti#e, these co#puter anal"ses dont work, !ut it gi$es "ou an anchor,* Niederhoffer said as he scanned the sheet) %&" checkers teacher said e$en a !ad s"ste# is !etter than no s"ste# at all)* +he data showed that the last ti#e trading see#ed to follow the current pattern was !etween No$e#!er, 2 , and Septe#!er, 2 2, when

there had !een eight such three'da" periods) 2n #ost of these instances, the #arket had re!ounded strongl" during the su!se.uent se$ent"'two hours) Niederhoffer looked at Owen 7ilson) %2ll !u" another fift" at ele$en'fift",* he said) Niederhoffers in$est#ent philosoph" is !ased on a !elief that o$er the long ter# the #arket goes up, !ut o$er the short ter# it constantl" re$erses itself) 2n his !ooks/his second, %Practical Speculation,* was pu!lished in 2 G/he co#pares the !eha$ior of in$estors to that of herds of ra#paging elephants that retrace their steps o$er and o$er) 9e refers to this pattern as a %?o>agola,* after >ata ?o>agola, the author of %?o>agolaJ 3n 3frican Sa$ages Own Stor",* a !ook pu!lished in 10G descri!ing the custo#s and wildlife of 7est 3frica) 3fter the !ook appeared, ?o>agola was re$ealed to !e an 3frican'3#erican $aude$ille entertainer fro# >alti#ore, the son of a for#er sla$e) 2n a 2 I post on (ail"Speculations)co#, Niederhoffer wrote, %Kegretta!l" ?o>agola was an 3#erican con #an) ) ) ) Ne$ertheless, 2 clai# that despite his i#posture, the #o$es !ack and forth in !ig #arkets often follow a ?o>agola, and e$en though, na" especiall" !ecause, ?o>agola was an i#postor his na#e should !e gi$en to #a5or #o$es which would see# to follow a s"##etr" up and down)* Niederhoffer doesnt clai# to !e a!le to sa" what the (ow or the S) C P) D will do next week or next #onth, !ut he !elie$es that o$er shorter periods/hours or da"s/there are so#eti#es predicta!le patterns that can !e exploited) 2n %+he Education of a Speculator,* he de$otes an entire chapter to this notion, co#paring the #arkets #o$e#ents to so#e of his fa$orite pieces of classical #usic, and 5uxtaposing pages of sheet #usic with stock charts) %7hen the #arkets are #o$ing in #" fa$or in a nice, gentle wa"/ne$er !elow #" initial price/2 often think of the <+rout Muintet, * he writes) %3nother fre.uent work 2 hear in the #arket is 9a"dns S"#phon" No) 0I) ) ) ) Kight after lunch, or !efore a holida", the #arkets ha$e a tendenc" to #eander up and down in a fi$e'point range a!o$e and !elow the opening) +he pattern is si#ilar to the twinkling 4'#a5or fifths of 9a"dns s"#phon")* 2n the earl" eighties, when he was #aking a presentation to potential clients, Niederhoffer so#eti#es took along Ko!ert Schrade, a friend who was a classical pianist) 3fter Niederhoffer talked a!out his #ethods, Schrade would de#onstrate the rh"th#s of the #arket on the piano) +his dou!le act didnt alwa"s i#press in$estors) %4alPEKS*/the 4alifornia Pu!lic E#plo"ees Ketire#ent S"ste#/%is not going to !e interested in in$esting with Victor, nor is the 9ar$ard endow#ent,* Paul (eKosa, a partner at the hedge fund &t) ?ucas who has known Niederhoffer since the late se$enties, said to #e) %Four !asic, !uttoned'down endow#ent, ad$ised !" professional consultants, wouldnt touch hi# with a ten'foot pole) 9is is a fund that is going to appeal to people like hi#J self'#ade people who ha$e a #a$erick streak)* 3 few #onths ago, after $isiting a Kedwood forest in Northern 4alifornia, Niederhoffer !eca#e fascinated !" the ecolog" of trees) 9e !ought se$eral !ooks on the su!5ect and posted an article on his 7e! site appl"ing what he had learned a!out trees to the stock #arketJ

?esson +woJ +he forest thri$es and !enefits after #an" see#ingl" disastrous e$ents) =ires clear the under!rush) (ead trees still standing pro$ide co$er for #uch flora and fauna) +rees contain so #uch water that there is still #uch !io#ass left when the" die, and the" contain the nutrients and #oisture that other plants or fungi need for sur$i$al) +his situation is called a !iological legac" !" the scientists, !ut is 5ust known as a gift !" the la"#en) +he nu#!er of, the a#ount of ti#e in !etween, and the extent of watershed declines that the #arket has witnessed in the last "ear, as well as the resilience of the #arket to these declines, is a good #easure of the health of a s"ste#) 2t is often good for future growth, to see deci#ated parts of the #arket landscape, such as the B)S) real'estate sector, which has currentl" taken it on the chin, or the Saudi 3ra!ian #arket, which is down 1DN) 3fter he wrote the article, Niederhoffer ga$e the !ooks he had read to one of his e#plo"ees, 4harles Pennington, a for#er professor of ph"sics, and asked hi# to de$elop precise nu#erical analogies !etween the life c"cles of forests and those of corporations, in the hope that the exercise #ight suggest so#e profita!le in$est#ents) Niederhoffers e#plo"ees are used to such re.uests) %+hings so#eti#es work that "ou wouldnt !elie$e, and things dont work that "ou would expect to work,* Ste$e 7isdo# said to #e after we had left Niederhoffer at his desk and gone downstairs to eat lunch in his for#al dining roo#) 8+he dining roo# is next to the li!rar", where Niederhoffer keeps his collection of rare !ooks and #anuscripts, including a first edition of 3da# S#iths %7ealth of Nations* and a cop" of (a$id Kicardos %Principles of Political Econo#" and +axation* which has #argin notes !" +ho#as &althus): 7isdo#, a clean'cut #an of fort"'six, #et Niederhoffer twent"'fi$e "ears ago, in New Fork 4it", when 7isdo# was a philosoph" #a5or at 9ar$ard and the chair#an of the uni$ersit"s ?i!ertarian 4lu!) %7e hit it off, and that was that,* 7isdo# recalled) 3fter graduating, in 108G, 7isdo# worked for Niederhoffer for fourteen "ears, until Niederhoffers !usiness collapsed, in 1001) 9e returned in 2 G, largel", he told #e, !ecause of Niederhoffers willingness to tr" new ideas) %E$er"one has co#putersA e$er"one has Bkrainian #ath Ph)()s,* 7isdo# said) %+here are people chopping at the data e$er" which wa") &aking #one" is not eas", and it re.uires a lot of creati$it") Victor alwa"s sa"s, <Suppose 2 didnt know an"thing) Suppose 2d ne$er traded this instru#ent !efore) 7hat would 2 think; * &anchester +radings three hedge funds are relati$el" s#all !" current standards) 3t the end of -une, the funds collecti$e $alue was a!out three hundred and fift" #illion dollars, of which a!out half !elonged to Niederhoffer and 7isdo#) 2n 2 G and 2 I, the funds increased in $alue !" #ore than fort" per cent each "ear, and in 2 D the $alue of the largest fund, &atador, rose fift"'six per cent/a perfor#ance that earned Niederhoffer an industr" award) ?ast "ear, his funds were flat) >ut in the first six #onths of 2 1 the" were up again, !" !etween thirt" and fort" per cent)

Niederhoffer acknowledges that his aggressi$e in$esting st"le and his reliance on !orrowed #one" increase the $olatilit" of his returns and the likelihood that he will suffer a cala#it") 2n &a", 2 @, &atador lost a!out thirt" per cent of its $alue, and in =e!ruar" of this "ear it suffered another !ig fall) &an" hedge funds clai# that the" can generate high returns with little risk) Niederhoffer tells friends who want to in$est #one" with hi# that it is too risk") 8&ost of his clients are #ulti#illionaires and financial institutions): %+he idea that "ou can #ake a lot of wealth in a stead", unspectacular fashion, with no great g"rations, is a canard,* he said to #e) %2f "ou are going to tr" and #ake fort" or fift" per cent a "ear, tre#endous $ariations are ine$ita!le)* 3t three oclock, when 7isdo# and 2 went !ack upstairs, Niederhoffer was outside pla"ing tennis with one of his traders, (uncan 4oker) Soon, howe$er, he returned, sitting down at his desk in a +'shirt, tennis shorts, and sneakers, ignoring the no'shoes rule) %+he #arkets supposed to go up fro# three until the close,* he said) %?ets see if it does)* 7hile 7isdo# and 2 were ha$ing lunch, the (ow had sta!ili6ed and Niederhoffer had sold so#e of the stock futures he had purchased earlier in the da") %+he worst #istake in this !usiness is to !e in o$er "our head,* he said) %2 was long a!out se$ent"' fi$e #illion dollars) 2n addition to that, 2 had #" regular option position) So 2 took the opportunit" to reduce #" exposure)* 2n addition to speculating on short'ter# #arket #o$e#ents, Niederhoffer fre.uentl" sells financial contracts, called %put options,* which, in the e$ent of a steep fall in the #arket, would o!lige hi# to pa" out large su#s of #one") +he !u"ers of these options are usuall" other in$estors seeking to hedge their positions, and in a sense Niederhoffer acts like an insurance co#pan"J in return for a pre#iu#/the price of the option/he agrees to !ear the risk of a #arket crash) Often, this is a good !usinessA !ut whene$er the #arket enters a $olatile period he is in peril) 8%9e is his own worst ene#",* Nassi# +ale!, the author and deri$ati$es trader, sa"s of Niederhoffer) %One of the #ost !rilliant #en 2 ha$e e$er #et, and he wastes his ti#e selling options/so#ething no!od" can ha$e an" skill in /and it lea$es hi# $ulnera!le to !lowing up)*: 3s I P)&)/the close of trading/approached, the (ow was again down, !" a!out a hundred and twent" points) Niederhoffer didnt see# particularl" discouraged, though) 9e thought that he discerned a ?o>agola pattern) %2ts going to !e $er" !ullish for to#orrow,* he said) %2t will !e the first one'hundred'point drop in sixteen hundred points) 2# going to !u" so#e #ore futures)* Niederhoffers theories a!out #arket !eha$ior date to his college "ears) 2n 10@I, when he was a senior at 9ar$ard, he wrote a thesis on stock'#arket patterns) 3t the ti#e, the so' called %efficient #arket h"pothesis,* which states that stock prices #o$e rando#l" and therefore cant !e predicted, was co#ing into $ogue) Niederhoffer, citing data on trading $olu#es and su!se.uent price #o$e#ents, clai#ed to ha$e found e$idence that contradicted the rando# #odel) 9is argu#ent didnt full" con$ince his ad$iser, the econo#ist Ko!ert (orf#an, !ut it helped earn hi# ad#ission to the Bni$ersit" of 4hicago ,raduate School of >usiness, where he enrolled in Septe#!er, 10@I)

3t 4hicago, Niederhoffer wrote se$eral research papers arguing that it was possi!le to detect predicta!le #o$e#ents in the stock #arket) 9e unco$ered e$idence, for exa#ple, that the #arket tended to do worse on &onda"s than on =rida"s) Se$eral #e#!ers of the facult" had helped to de$elop the efficient #arket h"pothesis, and Niederhoffers relationships with his professors were often contentious) 3t one se#inar, he later recalled, %2 critici6ed all those who had concluded that #arkets were rando#, including #ost of the professors in the roo#, as !eing too hea$"'handed in their testing #ethods to unco$er the structure of price $ariations) =urther, 2 cautioned the# that their failure to dispro$e a h"pothesis that no structure existed was #ethodologicall" inade.uate to support a conclusion that prices were rando#) 7hen 2 put it in the $ernacular, <Fou cant pro$e a negati$e, pande#oniu# !roke loose)* Niederhoffer was an earl" proponent of what is now called !eha$ioral econo#ics, and his unorthodox theories #ade hi# so#ething of an acade#ic cele!rit") 2n 10@0, he was hired at >erkele" as an assistant professor, and se$eral hundred students signed up for his course on finance) +hree "ears later, enroll#ent had dropped precipitatel") %2 wasnt too good at it, frankl",* he told #e) %2 was not a $er" good teacher, and 2 had #" own ideas a!out things) 2 was earning nine thousand dollars a "ear) 2 was pla"ing s.uash, doing research, da!!ling in !usiness) 2t was all too #uch)* Niederhoffer had also #arried/,ail 9er#an, a graduate of >r"n &awr who# he #et at the wedding of a 9ar$ard friend, the econo#ist Kichard Oeckhauser) 2n the earl" se$enties, ,ail and Niederhoffer, who had decided to lea$e acade#e, #o$ed to New Fork, where he started an in$est#ent'!anking fir# that sought out s#all, fa#il"'owned co#panies and helped sell the# to !igger, pu!lic co#panies) +he $enture pro$ed so successful that !efore long Niederhoffer and a partner, (an ,ross#an, started !u"ing and operating !usinesses the#sel$es) 3#ong the fir#s the" ac.uired were 3#erican 3l#ond, a >rookl"n co#pan" that pro$ided al#ond paste to !akeries, and +ech 4o# 2nc), a =lorida defense contractor that !uilt na$igation e.uip#ent for planes and ships) %2 would run the co#panies) Victor would $isit the# e$er" two "ears or so, and cause ha$oc,* ,ross#an, a law"er !" training, recalled recentl") %9ed sa" so#ething like <7hat this co#pan" needs is sales) No #ore research, no #ore secretarial duties/2 want "ou all out there selling things) +hen hed lea$e, and 2d sa", <(ont take an" notice of what he said) +hats 5ust Victor !eing Victor) * >" the late se$enties, Niederhoffer and ,ail had two daughtersJ ,alt, who was na#ed after =rancis ,alton, the Victorian pol"#ath who helped to de$elop regression anal"sis and coined the ter# %eugenics*A and Hatie) 2n 1081, Niederhoffer and ,ail separated, and he !egan dating his assistant, Susan 4ole, who# he #arried in 1001) +he" ha$e four daughtersJ Kand, Victoria, 3rte#is, and Hira) +he #other of Niederhoffers son, 3u!re", who is one and a half, is ?aurel Henner, a for#er editor at >loo#!erg who# he #et in 1000) %&" personal life is #ore co#plicated than Kupert &urdochs,* Niederhoffer 5oked to #e) 8&urdoch has six children fro# three #arriages): Niederhoffer !egan in$esting seriousl" in the stock #arket when ,alt and Hatie were "oung) 2n 1010, using #one" he had sa$ed, he started trading #ore or less full ti#e and

opened an office in #idtown) %2 got luck",* he told #e) %2n eighteen #onths, 2 ran fift" thousand dollars up to twent" #illion dollars) 2 had an idea that there was going to !e inflation, so 2 kept selling +reasur" !onds and !u"ing gold and sil$er) =or a long ti#e, it worked $er" well) +hen one da" 2 was pla"ing rac.uet!all in Staten 2sland with a gu" who su!se.uentl" !eca#e the B)S) cha#pion) 3fter the first ga#e, 2 called the office to see where the #arket was) +he price of gold had fallen fro# eight hundred and fift" dollars to six hundred dollars in an hour) &" net worth had gone down to ten #illion dollars) %+hat was where #" >righton >each training ca#e in,* Niederhoffer went on) %2d seen a lot of ga#!lers die !roke) &" father used to sa" 2d end up on the >ower", like the other ga#!lers) 2d sa", <(ad, 2$e got a s"ste#) 9ed sa", <>alone") +hose gu"s on the >ower" had #ore statistics and s"ste#s than "ou$e got) 2 took what he said seriousl") 2 told #" assistant, who later !eca#e #" second wife, <2f 2 e$er lose #ore than half #" stake, close out all #" positions) (ont let #e trade an"#ore) 2 went !ack to #" #atch) (uring the second ga#e, she sold e$er"thing) >" then, #" ten #illion dollars had dwindled to fi$e #illion, !ut at least 2 got out with that #uch)* 7all Street in the late se$enties was #uch less technologicall" sophisticated than it is toda") %2f "ou could sol$e two e.uations in two unknowns, "ou were a high'tech person,* Paul (eKosa recalled) %So#eone with Victors .uantitati$e skills was a rare !ird) 2n the earl" "ears, that ga$e hi# a !ig ad$antage)* 2n 1081, ,eorge Soros, who was !" then a wealth" in$estor !ut who was ha$ing a !ad "ear, heard a!out Niederhoffers reputed a!ilit" to predict short'ter# #arket #o$e#ents and arranged to #eet hi# at his office) Soros left the #eeting i#pressed, and ga$e Niederhoffer so#e #one" to #anage) +he #en shared an intellectual fascination with #arkets, and the" !eca#e close, talking on the phone nearl" e$er" da", and pla"ing tennis or chess se$eral ti#es a week) %&" father had 5ust passed awa",* Niederhoffer recalled) %,eorge was struggling) 9e needed a ledge to gi$e hi# so#e purchase) 2 pro$ided that)* >" the #id'eighties, Niederhoffer was #anaging #an" of Soross in$est#ents in !onds and co##odities, which were worth hundreds of #illions of dollars) On +uesda", Octo!er 2 , 1081, a da" after the (ow dropped fi$e hundred and eight points, Niederhoffer and Soros pla"ed tennis, as usual) >oth #en had lost a lot of #one" in the crash, and Niederhoffer had trou!le concentratingA Soros, howe$er, was cal#) (ont worr", he told Niederhoffer, the #arket will reopen to#orrow, and there will !e plent" of opportunities to #ake !ack our losses) O$er the next se$eral "ears, Niederhoffers funds "ielded an annual a$erage return of a!out thirt" per cent, which put the# near the top of the industr") 2n 100I, Business Wee! na#ed hi# the !est co##odities'fund #anager in the countr") 3 "ear later, he started two new hedge fundsJ Niederhoffer 2n$est#ents and Niederhoffer 2nternational &arkets) =or a while, he hardl" slept) (uring the da", he traded stocks and currencies in Europe and the Bnited States, and at night he !ought and sold -apanese "en) 9e also in$ested in e#erging #arkets, #aking successful pla"s in +urkish !onds and &exican stocks)

+oward the end of 100@, another profita!le "ear for hi#, Niederhoffer decided that he wanted to in$est in Southeast 3sia, which was widel" seen as a growing #arket) 9e dispatched an old friend, Ste$en 8>o: Heele", to the region) Heele", a $eterinarian who spent six #onths of the "ear li$ing in the 4alifornia desert without a telephone or electric power, had trekked in do6ens of countries) On one trip, while paddling down the 3#a6on, he had contracted #alaria, !riefl" gone !lind, and !een co#atose for a week) Heele" !elie$ed that assessing a de$eloping countr"s econo#ic prospects in$ol$ed not onl" #eeting with the 4)E)O)s of leading co#panies !ut stud"ing the lengths of discarded cigarettes/the theor" !eing that the wealthier people are, the longer their !utts/and the state of the !rothels) 3fter a couple of #onths in 3sia, he reported to Niederhoffer that the !rothels in >angkok had recentl" !eco#e #uch cleaner and safer, and that +hailand was an excellent place to in$est) (uring the pre$ious decade, the +hai econo#" had grown at an annual rate of al#ost ten per centA its interest rates were a#ong the lowest of an" countr" in the regionA and its stocks were cheap !ecause the" had fallen sharpl" earlier in the "ear) 2n the spring of 1001, Niederhoffer in$ested se$eral hundred #illion dollars in +hailand) 2nstead of !u"ing stocks in so#e of the countr"s !iggest co#panies, he entered into co#plicated deals with 7all Street fir#s to !u" futures contracts that were tied to the $alue of +hai stocks) +he #argin re.uire#ents for futures purchases are #uch lower than those for stock purchases, so he was a!le to put up a relati$el" #odest a#ount of cash, while using !orrowed #one" to accu#ulate su!stantial holdings) 9is ti#ing was atrocious) 2n &a" and -une, a wa$e of selling swept through the 3sian financial #arkets, and +hailand was especiall" hard hit) &an" o$erseas in$estors tried to repatriate their #one", and the +hai go$ern#ent started to run out of foreign'exchange reser$es) On -ul" 2nd, it was forced to a!andon what a#ounted to a fixed exchange rate !etween the !aht and the dollar, which had !een in place for #ore than a decade) +he +hai currenc" collapsed, and so did the stock #arket) +he $alue of #an" of Niederhoffers +hai holdings dropped !" #ore than ninet" per cent) 9is lenders de#anded that he put up #ore collateral) 2n order to #eet their de#ands, he was forced to sell #an" of his profita!le in$est#ents, which left his funds se$erel" depleted) %7e were like so#eone who is i##une'deficient,* Ste$e 7isdo# recalled) %7e had lost so #uch #one" that we had no resistance left to other #aladies)* 3part fro# his +hai holdings, Niederhoffers #ost su!stantial in$est#ents were in the 3#erican futures #arkets) 3t first, the B)S) #arket weathered the 3sian crisis prett" well, !ut in the fall of 1001 it !eca#e #ore $olatile) On Octo!er 21, 1001, the (ow fell !" #ore than fi$e hundred points, and, for the first ti#e in recent histor", the #arket closed earl") 3#id widespread panic, Niederhoffer fielded calls fro# lenders) So#e, including Kefco, a large co##odities !roker, de#anded that he gi$e the# #ore #one" to support his options positions) Niederhoffer was una!le to co#e up with the cash, and the next #orning Kefco li.uidated his portfolio) %2t was a $er" poor decision on #" part to in$est in +hailand,* Niederhoffer told #e) %2 had no scientific !asis for in$esting there) 2n the B)S) #arket, there is e$idence that it is a good ti#e to in$est after a !ig fall) 2n +hailand, there was no such statistical e$idence) 2t was purel" a .ualitati$e idea) 2d seen Soros do that a lot of ti#es and #ake a lot of

#one", !ut it didnt work for #e) Pre$iousl", 2 had had two or three .ualitati$e ideas that #ade #one"/+urkish !onds, &exican stocks/and it lured #e into a false sense of securit")* 7e were sitting on a !ench outside a !uilding in the East =ifties, where ?aurel Henner li$es and Niederhoffer sta"s when he $isits) 9e was drinking a !ottle of organic le#onade) 2 asked hi# whether hu!ris had contri!uted to his downfall) %Feah, 2d sa",* he replied) %2n those da"s, we alwa"s wanted to !e No) 1 in the ratings) +here was a 4anadian fir#, =ried!erg/the" were ha$ing a good "ear, and we wanted to keep up with the#) 2t was alwa"s nip and tuck !etween us and the#)* Niederhoffer was silent for a #o#ent) +hen he spoke .uickl"J %Fou asked for reasons/2 could na#e another ten) 7e had no stops) 7e picked the wrong countr" to in$est in) 7e were too illi.uid) 7e had too !ig a percentage of the #arket, and we didnt ha$e the a!ilit" to get out of our positions) 7e were too financiall" $ulnera!le to the !rokers) 2 didnt take account of the fact that 2 could !e s.uee6ed and that custo#ers could withdraw their #one") >ut #ainl" 2 didnt ha$e a proper foundation for #" in$est#ent there) 2 had no knowledge of the countr") 2d ne$er e$en $isited the countr") 3ll 2 had done was finance a trip !" >o Heele" to the !rothels there) 3fter his funds folded, Niederhoffer fell into a deep depression) 9is eldest daughter, ,alt, a fil# producer and no$elist who is thirt"'one and li$es in &anhattan, recalls coaxing hi# to ?ong 2sland for a walk on a !each, where he knelt on the sand like a 6o#!ie) %2t wasnt 5ust depression,* she said) %2t was self'hatred and hopelessness) 9e felt like he had let people down) 2t was so sha#eful) +his was a gu" who grew up in a #odest house, the son of a cop) 2#agine what it would !e like to create all of those things for "our fa#il" and then to lose the#)* Niederhoffer had #anaged to retain so#e of his assets) 9e #ortgaged his house in 4onnecticut and sold a collection of troph" and presentation sil$er and so#e of his rare !ooks, which ena!led hi# to pa" off his creditors) 9e used this period of enforced inacti$it" to reconsider his approach to in$esting and to retool his pattern'recognition software) 3fter a!out six #onths, using se$eral hundred thousand dollars of his own #one", he started trading again) %2 had no !rokerage account/no !roker would do !usiness with #e under ordinar" ter#s,* he said) %No custo#ers would open a new account with #e)* 2n 1000 and 2 he did well, and in 2 2 he started &atador, an offshore hedge fund) 2ts !iggest in$estor was Octane, a hedge fund !ased in Swit6erland, whose chief in$est#ent officer, &ustafa Oaidi, is an old friend of Niederhoffers) 3t the !eginning, &atador had less than ten #illion dollars to in$est) 2n its second "ear, the fund had a return of fort"'one per cent, and Niederhoffers renewed success helped hi# attract #ore #one", including so#e fro# for#er clients who had lost their in$est#ents in 1001) 8=or these in$estors, he wai$ed the heft" fees that hedge funds nor#all" charge): E$entuall", he had enough cash to open two #ore funds) 2n =e!ruar", 2 G, Niederhoffer pu!lished %Practical Speculation,* a #anual for serious in$estors, which he co'wrote with ?aurel Henner, who# he had !een dating for se$eral "ears) +hat "ear, he separated fro# his wife, Susan, and in 2 I he and Henner launched

(ail"Speculations)co#, which the" dedicated to %the scientific #ethod, free #arkets, deflating !all"hoo, creating $alue, and laughter)* +he 7e! site has since e$ol$ed into an infor#al social'networking site for speculators and aspiring speculators) %2 #et a lot of #" friends through the site,* -a#es ?acke", the trader who once worked with Niederhoffer and who posts regularl" on the site, said) %Victor is like the hu! where the wheels of speculation turn) 9es the center of so #an" of our relationships/we call hi# the 4hair#an) 9es the gu" who keeps e$er"one in line)* 2n 3pril, 2 @, Niederhoffer attended a dinner at the St) Kegis 9otel, where &3K9edge, a co#pan" that pu!lished a newsletter for the hedge'fund industr", presented hi# with an award as the top #anager in the co##odit"'fund categor") %7hat 2# proudest of is that we$e #ade se$eral hundred #illion dollars after fees,* Niederhoffer said to #e in -ul")* %7e$e returned a lot #ore #one" to our in$estors than the" ha$e in$ested)* 3s Niederhoffer and his funds prospered, it appeared to #an" of his old friends and colleagues that he had finall" !eco#e a #aster speculator) %2t is i#possi!le to go through what Victor went through without it altering what "ou do,* Paul (eKosa told #e in -ul") %2t #ade hi# #ore conscious of risk, #ore attuned to it) 2t was an expensi$e education, !ut the i#portant thing is that it wasnt wasted)* 2r$ing Kedel, a for#er gold and sil$er trader and chair#an of the New Fork 4o##odities Exchange, who was a #entor to Niederhoffer in his 7all Street da"s, said, %+o !e a great trader "ou need discipline) Fou ha$e to ha$e certain strategies that "ou follow, !ut "ou also ha$e to ha$e the flexi!ilit" to know when it is going wrong) 3nd "ou ha$e to know to ne$er go !e"ond what "ou can afford to lose)* 2 asked Kedel whether Niederhoffer has these .ualities) 9e replied, %9e does now)* On the first +hursda" of e$er" #onth, Niederhoffer hosts a #eeting of li!ertarians at the ,eneral Societ" of &echanics and +rades#en, on 7est =ort"'fourth Street) One +hursda" e$ening in earl" -une, a!out se$ent" people were gathered in the societ"s li!rar", listening to an elderl" wo#an in a white hat, who stood at a lectern talking enthusiasticall" a!out 4hristopher 9itchenss !ook %,od 2s Not ,reat)* 3 #iddle'aged #an with a !eard spoke next, urging the others to acco#pan" hi# on a walking tour he hosted called 3"n Kands New Fork, in which he $isited local !uildings where Kand had li$ed and held o!5ecti$ist salons, as well as sites/the 7aldorf'3storia, ,rand 4entral +er#inal/that ser$ed as inspirations for places in her no$el %3tlas Shrugged)* +he #eetings are open to the pu!lic, and Niederhoffer, who was sitting on a ta!le at the !ack of the roo#, swinging his legs, encourages each person to speak) 9e calls these sessions the New Fork 4it" -unto, after the discussion group that >en5a#in =ranklin founded in Philadelphia in 1121, which held #eetings for thirt" "ears and e$entuall" !eca#e the 3#erican Philosophical Societ") Niederhoffers -unto is #ore casual, !ut he takes li!ertarianis# seriousl", considering it to !e a natural co#ple#ent to speculating) 3s a state#ent on his 7e! site puts it, %Victor Niederhoffer !elie$es the purpose of life is the pursuit of happiness and achie$e#ent, and that the $oluntar" transactions that flow

naturall" out of an enterprise s"ste# are the ke" to #aterial and personal freedo#, and peace)* 2n an op'ed article that he pu!lished in the Wall Street "ournal in 1080, he argued that speculators ser$e se$eral i#portant econo#ic functions) 7hen a good !eco#es scarce, he said, speculators !id up prices, which encourages fir#s to produce #ore and consu#ers to !u" less, and helps to restore !alance to the #arket) %2 a# proud to !e a speculator,* Niederhoffer wrote) %2 a# proud that #" hu#!le atte#pts to predict +uesda"s prices on &onda" are an indispensa!le co#ponent of our societ") >" !u"ing low and selling high, 2 create har#on" and freedo#)* +he guest speaker at the #eeting was +ho#as (i?oren6o, an econo#ics professor at ?o"ola 4ollege, in &ar"land, and the author of fourteen !ooks, including %9ow 4apitalis# Sa$ed 3#ericaJ +he Bntold 9istor" of Our 4ountr" fro# the Pilgri#s to the Present)* (i?oren6os su!5ect was the fil##aker and li!eral gadfl" &ichael &oore) Not ha$ing seen &oores latest #o$ie, %Sicko,* (i?oren6o was at so#ething of a disad$antage, !ut he expressed outrage at &oores failure, in his pre$ious fil#s, to recogni6e the i#portance of co#petition, the $irtues of sweatshops, and the depredations of socialis#) 3t one point, Niederhoffer interrupted hi# and asked, %7hat are the general principles;* (i?oren6o replied, %&arkets work and go$ern#ent'run #onopolies dont)* 3t least one #e#!er of the audience, a gra"'haired #an, see#ed to think that this was going a !it too far) 9e cited the =ederal 9o#e ?oan >anks, an agenc" that #akes #ortgages #ore readil" a$aila!le, and the National Park Ser$ice) (ont "ou agree that the go$ern#ent does so#e things well; the #an asked) %No,* (i?oren6o replied) %+he go$ern#ent has screwed up the national parks) 2 think capitalis# would do a #uch !etter 5o! with land)* Shortl" after ten oclock, Niederhoffer ended the #eeting) 2 was eager to speak to hi# a!out the stock #arket, which had fallen !" al#ost two hundred points that da") %2 cant talk a!out it,* he said when 2 approached hi#) %2ts too painful) 2 #ight !e a!le to re$iew it in a few da"s)* 9e walked across the roo# to greet Henner and 3u!re") 9e put his son on his shoulders and disappeared onto =ort"'fourth Street) On &a" G, 2 @, the da" that 3u!re" was !orn, Niederhoffers wife, Susan, filed for di$orce) 3s his spouse and the legal owner of #an" of his assets, which he had transferred to her in 1001, she had clai# to #uch of his fortune) =or #onths, the couples law"ers argued) +hen, in =e!ruar", Niederhoffer persuaded Susan to drop the di$orce proceedings) 2n return, he agreed to lea$e Henner at the end of 2 1 and return to her) +hen he infor#ed Henner of the plan) =or now, Niederhoffer shuttles !etween the wo#en) =ro# Sunda" to +uesda", he and Susan share the house in 4onnecticut) 8+hree of their four daughters ha$e left ho#eA the "oungest, Hira, attends !oarding school): 9e spends the rest of the week in &anhattan, with Henner and 3u!re") %9es e#otionall" in$ol$ed with !oth of those wo#en right now,* ,alt said to #e) %9e ne$er reall" lea$es wo#en) 7i$es !eco#e extended'fa#il" #e#!ers, like in'laws, or honorar" #e#!ers of the hare#) +he" tolerate it !ecause hes a

flawed genius and a #an) +he" take the good with the !ad) 2ts all 2$e e$er known) 3ll 2$e e$er known is we are weird)* 2 was ha$ing lunch with ,alt at a =rench restaurant near her apart#ent in 4helsea) 3lthough 3u!re"s !irth had !een a shock to the fa#il", she went on, her father sees his other children regularl", and he is on good ter#s with his first wife, ,ail/,alts #other /who di$ides her ti#e !etween New Fork and +exas) %7e$e !eco#e kind of like this $er" functional d"sfunctional fa#il",* ,alt said) %+o #ost people, it is co#pletel" a!nor#al, and "et we$e co#e to ha$e this so#ewhat wholeso#e, happ" d"na#ic) 3ll of the girls are close) &" #other and Susan ha$e grown $er" close)* Kecentl", ,alt added, she, ,ail, Susan, and all her sisters except 3rte#is, who was awa", got together to cele!rate the third !irthda" of her daughter, &agnolia) ?aurel was not at the part") %?aurel is another stor",* ,alt said) %Susan and ?aurel are not close) +heres nothing happ" a!out that)* ?ast "ear, ,alt pu!lished a no$el, %3 +axono#" of >arnacles,* which she descri!ed to #e as %an effort to exorcise #" de#ons a!out li$ing in a fa#il" that was different fro# e$er"!od" elses)* +he no$el features an eccentric and do#ineering !usiness#an who has six daughters and desperatel" wants a #ale heir) E$entuall", he ac.uires one in surprising circu#stances) Shortl" after the !ook ca#e out, Niederhoffer took ,alt to lunch at the =our Seasons and told her that her !ook had !een prescient) %Oh, #" ,od, "ou ha$e a lo$e childP* ,alt !lurted out) %No,* Niederhoffer said) %2 ha$e a son)* 3 few #onths later, 3u!re" was !orn) Henner, who is fift"'three, told #e that she is unhapp" a!out Niederhoffers arrange#ent with her) %O!$iousl", there is a lot of anger there,* she said) %>ut it is not 5ust #e) +here is a !a!" in$ol$ed)* 2 expressed surprise that her relationship with Niederhoffer re#ained cordial) %7e had eight great "ears,* she replied) %9e ga$e #e so #uch) 2 a# i##easura!l" !etter off on so #an" le$els through #eeting Victor) 9e was the !est lo$er 2 e$er had/not 5ust in sexual ter#s) 7e wrote a !ook together) 9e is a great, ro#antic, gentle person)* Niederhoffer declined to discuss his relationship with Susan) 3s for Henner, he said, %7e$e had a $er" fine colla!oration and had #uch pleasure and happiness together, and we ha$e a wonderful son) 7ere parents, and we still ha$e #utual respect and ad#iration for each other)* 9e went on, %7e didnt ha$e in #ind the ulti#ate outco#e, !ut we created a fantastic legac"/the !a!", the !ooks, and the articles)* On +uesda", -ul" 11th, the (ow rose a!o$e fourteen thousand for the first ti#e) +he econo#" was growing, the long'ter# interest rate had dropped !ack to fi$e per cent, and the $olatile trading da"s of earl" su##er see#ed largel" to ha$e !een forgotten) 3fter the #arket closed, howe$er, >ear Stearns announced that two of its hedge funds, which had in$est#ents in securities tied to su!pri#e #ortgages, had lost al#ost all their $alue) Pro!le#s in the su!pri#e #arket spilled into #one" #arkets that !anks and other financial institutions rel" on to finance their dail" acti$itiesA se$eral #ore hedge funds

went underA and co##entators !egan to speak of a loo#ing %credit crunch)* Stock #arkets around the world experienced wild fluctuations) On +uesda", -ul" 2Ith, the (ow fell two hundred and twent"'six points) +wo da"s later, it dropped three hundred and ele$en points) 4o##entators on 4N>4 were #aking o#inous pronounce#ents) 2 sent Niederhoffer an e'#ail, sa"ing that 2 hoped he had !een well positioned for the #arkets correction) 9e replied in three wordsJ %2 was not)* On =rida", -ul" 21th, the (ow fell another two hundred points, closing four per cent down for the week) +he #arkets were still $olatile a week later, when Niederhoffer ca#e into &anhattan for his #onthl" li!ertarian #eeting) 3fter it ended, we went across the street to a restaurant, where he ordered a cappuccino) 9e looked pale and haggard, and "ears older) =or se$eral #inutes, we sat in silence) +hen, in a low $oice, he said, %+hings ha$e changed totall" since we last spoke) +he situation is funda#entall" different) 2t is critical)* Henner and 3u!re" 5oined us, !ut Niederhoffer hardl" see#ed to notice the#) %7e are fighting for sur$i$al night and da",* he said when 2 pressed hi# for details) %2 was caught wrong'footed in the #arket tur!ulence) 2# not as s#art as 2 thought 2 was)* +he pre$ious week, the 4hicago &ercantile Exchange, in response to the tur#oil in the #arket, had raised its #argin re.uire#ents on futures traders, a #o$e that was potentiall" de$astating for Niederhoffer, who had hundreds of #illions of dollars in options) 9e had #ore #one" in reser$e than he had had in 1001, !ut he was worried) %2ts a #atter of redeplo"ing resources,* he said) %3lso, in tr"ing to !e courageous in response to the crisis, 2 put up a lot of #" own capital) Fou re#e#!er the stor" of the Essex and 4aptain Pollard; 7e are like a tin" fishing !oat off the coast of 3laska that has !een caught in the !iggest wa$es in a hundred "ears)* +alking a!out his predica#ent see#ed to i#pro$e Niederhoffers #ood a little) 9e ate so#e sor!et and pla"ed with 3u!re") +hen he said, %Now 2 ha$e to go ho#e and work)* Henner got up to lea$e, straightening her dress and inad$ertentl" exposing a thigh) %(o that again,* Niederhoffer co##anded) %(o what;* Henner asked) %?ift it up,* he said) %2t can keep a #an afloat)* +he" !oth laughed) (uring the next two weeks, 2 tried repeatedl" to talk to Niederhoffer) Part of the reason for his reticence was that he feared a leak) 9edge funds depend on access to !orrowed #one") 2f lenders learn that a fund is in trou!le, the" #ight decide to stop gi$ing it #one"/which can ha$e disastrous conse.uences for the fund) On -ul" G th, Sowood 4apital &anage#ent, a >oston'!ased fund, announced that the assets under its #anage#ent had lost #ore than fift" per cent of their $alue in a few weeks, and the fund closed shortl" afterward) >" #id'3ugust, two funds operated !" ,old#an Sachs had lost a!out a third of the $alue the"d had at the !eginning of the "ear) ,old#an decided to in$est two !illion dollars of its own #one" in one of the funds, ,lo!al E.uit" Opportunities, and it persuaded se$eral wealth" in$estors to put up another !illion dollars on fa$ora!le ter#s) +he spectacle of one of 7all Streets #ost profita!le fir#s !eing forced to shore up one of its flagship funds suggested so#e of the pressures that Niederhoffer was confronting)

2n toda"s interconnected financial #arkets, there is no such thing as an isolated incident) 7hen a dra#atic e$ent occurs in one sector, the effects are felt in others) +he ,old#an funds were co#puter'dri$en funds, and their software progra#s had failed to predict the si6e and speed of #o$e#ents in the stock #arket) Prices had got %wa" out of whack,* (a$id Viniar, ,old#ans chief financial officer, co#plained) %7e were seeing things that were twent"'fi$e standard'de$iation #o$es se$eral da"s in a row)* ?ike Niederhoffers funds, the ,old#an funds were hea$il" le$eraged) =or e$er" hundred dollars of capital that the ,lo!al E.uit" Opportunities fund owned, it had !orrowed a!out six hundred dollars) 7hen a fund is le$eraged six to one, a fi$e'per'cent fall in the $alue of its portfolio !eco#es a thirt"'per'cent loss in capital) %?e$erage is a dou!le'edged sword,* Kichard >ernstein, an anal"st at &errill ?"nch, wrote in a note to clients a few da"s !efore ,old#an announced its efforts to prop up the ,lo!al Opportunities fund) %2t enhances returns on the upside, !ut also #akes underperfor#ance #ore rapid and se$ere)* Of course, Niederhoffer was aware of these dangers) >ut, !etween the #iddle of 2 G and the start of this "ear, the financial #arkets had !een #ostl" cal#) Stock prices had gone up, and, at"picall", the" had done so in a fairl" straight line, with onl" two significant re$ersals, in &a", 2 @, and in =e!ruar", 2 1) =ro# Niederhoffers perspecti$e, the decline in #arket $olatilit" was a welco#e de$elop#ent, !ecause it #ade his options trading #uch less risk") 7ith prices stead" or rising, he was less likel" to !e caught on the wrong end of a !ig #arket #o$e) 3s the .uiet ti#es continued, #an" in$estors were lulled into !elie$ing that a less $olatile era had !egun) 3lan ,reenspan, who was the chair#an of the =ed until =e!ruar", 2 @, helped to feed this illusion !" talking a!out how financial inno$ations, such as the de$elop#ent of asset'!acked securities, had spread risks #ore widel", #aking the #arket less $ulnera!le to shocks) +he crisis in the su!pri#e'#ortgage #arket changed all this) 2n the stock #arket, $olatilit" was #ore pronounced than it had !een for "ears) E$en on da"s when the (ow closed 5ust a few points down, prices lurched around) On =rida", 3ugust 1 th, the (ow fell #ore than two hundred points !efore reco$ering at the close) On +hursda", 3ugust 1@th, it fell al#ost three hundred and fift" points !efore closing down 5ust fourteen points) 3 #easure of #arket tur!ulence which #an" traders watch closel" is the 4hicago >oard Options Exchange Volatilit" 2ndex, known as the V2E) >etween -anuar", 2 G, and -anuar", 2 1, the V2E fell fro# #ore than thirt" to a!out ten) >" the end of -ul", it had surged a!o$e twent", and on 3ugust 1@th, the da" !efore the =ed cut the discount rate, it hit thirt"'se$en) +he surge in $olatilit" pro#pted the 4hicago &erc to raise its #argin re.uire#ents for options on S) C P) D 2ndex futures twice, first fro# two per cent to three per cent, and then fro# three per cent to four per cent) Niederhoffer was asked to dou!le the a#ount of capital supporting his positions, and he found it difficult to raise the necessar" cash) So#e of his in$est#ents had lost a lot of their $alue, and the $alue of others was difficult to deter#ine) +here were so #an" #o$ing parts in his portfolio that he wasnt sure where he stood) 7hen a trader cant #eet his #argin re.uire#ents, he is at the #erc" of his

creditors) 3s Niederhoffers financial situation deteriorated, 3(& 2n$estor Ser$ices, a 4hicago'!ased !rokerage fir# that caters to futures traders, ordered hi# to li.uidate so#e of his options positions) 7orking late into the night, Niederhoffer !erated hi#self for lea$ing hi#self so exposed) Keferring to the #argin calls, he said to one ac.uaintance, %2 shouldnt ha$e !een in the position where it could ha$e had such an i#pact)* (espite the lessons of 1001, and the precautions he had taken, he was again in o$er his head) E$er" 3ugust, Niederhoffer throws a !ig part" in New Fork 4it", to which he in$ites do6ens of regular contri!utors to his 7e! site as well as so#e of his friends) +his "ear, there were a!out se$ent"'fi$e guests) &ost were New Forkers, !ut so#e had co#e fro# as far awa" as England) =or three da"s, Niederhoffer entertained the# at his expense) On =rida", he organi6ed a trip to the New Fork >otanical ,arden and to a &ets ga#e) On Saturda", he hosted a !each outing at 4one" 2sland and a dinner at (el#onicos, near 7all Street) On Sunda", he pro$ided a picnic !runch in 4entral Parks 4onser$ator" ,arden) 3s the crisis in the #arket spread, Niederhoffer had !riefl" considered cancelling the part", !ut he decided that to do so would ha$e alerted people to his trou!les) 3t three oclock on Saturda" afternoon, 2 saw hi# in the crowd on the !oardwalk at 4one" 2sland, across fro# the 4"clone roller coaster) 3s usual, he wasnt difficult to spotJ he was wearing "ellow trousers and a "ellow +'shirt that said %4hief Speculator* on the !ack) On the !each, his staff had set up a !lue canop", and a!out a do6en people had gathered underneath it, taking shelter fro# the sun) Niederhoffer had 3u!re" on his shoulders, and he see#ed to !e in a !etter #ood than when 2 had last seen hi#) 9e #akes fre.uent $isits to 4one" 2sland and >righton >eachA the house he li$ed in as a !o" was a!out half a #ile east of where we were standing) %7e are going on the 7onder 7heel,* Niederhoffer said, gesturing o$er his shoulder at the slowl" turning =erris wheel, which dates to 102 ) 7hile he was gone, 2 spoke with two of his guests, a "oung ?i!erian &)>)3) student who said that he had recentl" posted an article on (ail"Speculations)co# a!out ga#!ling on thorough!red racing, and an older =rench#an who traded stocks at a 7all Street fir#) +he at#osphere was friendl" and relaxed) None of the guests #entioned Niederhoffers financial predica#ent) 3t @ P)&), the part" recon$ened at (el#onicos, which Niederhoffer had reser$ed for the e$ening) 3fter cocktails in the dark'panelled !ar, his guests entered the ornate dining roo#, where a >roadwa" tap dancer and a fa#il" of 9awaiian singers perfor#ed) 2 was seated next to ?aurel Henner and 3u!re", !ut didnt see #uch of Niederhoffer, who was wearing a lilac 5acket and spent #ost of the e$ening ta!le'hopping) 3fter dessert was ser$ed, he stood up to speak) %+his is a historic gathering,* he said, swa"ing slowl" !ack and forth) %7e are here in the #iddle of one of the greatest tur#oils in 7all Street histor") 2 a# sure that #an" of "ou are keen to know how we are doing) 7ell, 2 can tell "ou that it has !een $er" difficult) +he !attle has !een 5oined, and it is still to !e deter#ined who the $ictor is) 2 alwa"s sa"

that when "ou are in the #iddle of one of these situations it is !etter to sa" nothing) 2f "ou sa" "ou are doing !adl", it gi$es a##unition to "our ene#ies) 2f "ou sa" "ou are doing well, "ou are te#pting fate) ) ) ) 7e will see what happens and who wins the final point)* ?ater in 3ugust, after the =ederal Keser$e cut the discount rate/the rate at which it lends to !anks/the #arkets cal#ed downA !ut Niederhoffers woes continued) 2n Septe#!er, he was forced to close two of his funds, including his flagship, &atador, which had declined in $alue !" #ore than se$ent"'fi$e per cent) 3fter cashing out #an" of his in$est#ents, Niederhoffer repaid his lenders and returned what #one" was lefto$er to his clients) 9e laid off se$eral e#plo"ees and consulted with his law"ers) &eanwhile, ru#ors circulated on the 2nternet that, for the second ti#e in a decade, his funds had %!lown up)* 9ad he !een a!le to wait a little longer !efore li.uidating his trades, his funds #ight ha$e recouped #ost of the losses) 3fter the =ederal Keser$e cut interest rates again, on Septe#!er 18th, the stock #arket rallied further and $olatilit" decreased) Still, Niederhoffer sounded philosophical) %+he #arket was not as li.uid as 2 anticipated,* he said) %+he #o$e#ents in $olatilit" were greater than 2 had anticipated) 7e were prepared for #an" different contingencies, !ut this kind of one we were not prepared for)* Niederhoffer was still trading for his own account, and for so#e re#aining clients) %&" !asic ideas a!out the creati$e power of the #arket, !u"ing in panics, !u"ing on weakness /2 dont think what has happened has an"thing to do with that stuff,* he said) %2 a# going to keep going, for !etter or worse)* Q
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