A Hedge Fund Meltdown
Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on TheStreet.com. He's also a regular contributor to RealMoney, TheStreet.com's subscription site. If you'd like to see all of Jon Markman's RealMoney commentary, click here for information about a free trial.
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).
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV