A Hedge Fund Meltdown

Although TheStreet.com and The Wall Street Journal quoted anonymous sources last week who claimed that part of Refco's troubles -- which include a $450 million phantom debt -- stemmed from this episode, Niederhoffer asserts that it is virtually impossible. He notes that two days after the asset transfer, he came to a contractual agreement with Refco, in talks with then-chief executive Phillip R. Bennett, that fully released him from all liabilities and responsibilities. He owed only $2 million in personal margin debt, which he repaid a year later. Niederhoffer also points out that the transaction was scrutinized by several regulatory agencies at the time and audited thereafter. There were no loose ends.

The succeeding three years were painful. He says he had a "substantial net worth" at the time the fund closed, and that he was never close to personal bankruptcy. But he lost his livelihood, his reputation and, in some measure, his self-confidence. He also was forced to sell his world-class silver collection and other prized possessions. But over time he reached a settlement in a suit against against the Chicago Mercantile Exchange and repaid substantial amounts of his customers' losses.

A Bullish Matador

Today, Niederhoffer is back on his feet, handling a nine-figure account that he bootstrapped mostly from scratch. His new offshore Matador Fund is listed by hedge-fund rating firms as the world's top performer over the past one and three years, with a 50% return in 2004 and a 41% return so far in 2005.

In my opinion, Niederhoffer's return to the arena should be cause for celebration, not scapegoating. His success, defeat, reflection and re-emergence are all emblematic of a cycle of persistence and ambition over entropy and adversity that characterizes our best American myths. With any luck, Refco will survive too, chastened but stronger.

As someone who has firsthand knowledge of the extreme disruption that a financial crisis can cause, Niederhoffer said investors today need to understand that much of the recent stock market decline has derived in large part from the forced unwinding of highly leveraged positions either held by Refco or its customers. "There are a lot of bottom-feeders and vultures who specialize in profiting from liquidations," he said Sunday. "When the dust settles, there will be a great rally. Dislocations like this one happen rarely, and on average leave the market in a positive position." He added, with a self-deprecating twist: "I'm always bullish, yet I'm more bullish now than usual. But don't forget, I've been wrong before."

What's the difference between his methods now and pre-1997? "The main thing now is that I don't trade in Thailand," he said.