A Hedge Fund Meltdown

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The stunning crash of the futures brokerage Refco(RFXCQ) this month has cast an unflattering spotlight on the important but little understood world of high-stakes commodities trading.

It is a world where hundreds of billions of borrowed dollars change hands around the clock to speculate on the direction of currencies, hedge the price of corn and cattle, and bet on the volatility of the U.S. stock market. And it is a world where the fortunes of veteran pros and precocious amateurs alike can be won or lost faster than you can say "eurobond."

One speculator who knows both sides of this world better than anyone is Victor Niederhoffer, a hedge fund manager who made hundreds of millions in the futures market for customers from the early 1960s to the mid-1990s, and then lost a bundle in a single ill-fated day. His name has surfaced in the past week in connection with the demise of Refco, and so it seemed appropriate revisiting to try to understand the brokerage's blowup from his perspective, starting with his business relationship with Refco eight years ago.

More than 200 major brokerages across the globe will let you set up an account to wager on futures, including giants such as Goldman Sachs(GS). But for more than two decades, the cool sophistication and low prices of Refco made it the house of choice among both private traders and swashbuckling hedge-fund managers. In terms that stock traders can appreciate, it combined the cheap trades of an E*Trade Financial(ET) with the strong customer service of a Charles Schwab(SCH).