A Hedge Fund Meltdown

Striving to Be No. 1

Niederhoffer opened up an account at Refco for his own trading not long after ditching the professorial life that he had enjoyed for a short while at the University of California, Berkeley. A statistics whiz, he developed a unique approach to making money by quantifying the predictive properties of daily and hourly movements between stocks, bonds and other markets. His style attracted the attention of industry lion George Soros, and soon he was trading an account worth more than $100 million for Soros and others.

He spoke with Soros up to 10 times a day. The work was challenging but lucrative. An iconoclast, Niederhoffer soon spread his wings and figured out how to apply his techniques to markets as far afield as Turkish bonds, the Mexican peso and Japanese stocks. He also bought and sold private companies, made venture-capital investments and earned numerous awards en route to making his partners increasingly wealthy.

In 1996, he explained his methods and took a bow by writing an autobiography called The Education of a Speculator. Although the book was well-received, he came to see its publication as an act of hubris, for the very next year would prove to be the start of his undoing. "My big mistake was that I strived too hard to be No. 1," he said.

In 1997, Niederhoffer became enraptured by the siren of emerging markets, which was to that era what the Internet would become two years later. He made major speculative investments in Thailand, and when its stock market and currency fell 50%, he applied his usual technique of buying into the panic. By midyear, as the Asian currency crisis ravaged the region, he was losing money in illiquid investments there rapidly, and though he tried to pare down his positions, he could not get out.

His capital position worsened over the summer as the contagion spread to the U.S. markets, driving them steeply lower. Still, he kept trading here as he always had, using an against-the-tide strategy that had frequently in the past taken him to the brink of ruin before paying huge dividends. He says he had a deal with his longtime Refco account manager at the Chicago Mercantile Exchange that if he were to receive a margin call, he would have several days to raise the cash to meet his obligation.