Niederhoffer's Second Act Has Plot Twist

At the awards dinner, Niederhoffer, who is also a writer, told his hedge fund peers that he appreciated "the difficulty and the courage it took to give me an award, since I once went under,'' according to the Bloomberg article, which was published before Matador's May returns came to light.

To be fair, May was a brutal month for stocks, with the S&P 500 falling 3%. Hedge funds, which had been enjoying a banner year up until May, were not immune from the carnage. Barclay Trading Group, a hedge fund tracking firm, estimates that 70% of hedge funds lost money in May, with the average fund dropping 3%.

Barclay notes there were a number of funds that lost more than 20%. Clearly, Niederhoffer isn't the only manager seeing red on his trading screen these days.

Still, Niederhoffer's bad month is an illustration of the high-risk trading strategy that the Connecticut-based hedge fund manager is famous for. Matador's tumble in May also reveals how easy it is for the tables to turn on a hot manager, especially when he's making big bets with borrowed money.

Matador has a history of volatile trading months. Early in its life, the fund, which is open only to offshore investors, lost 30% in July 2002, according to Bloomberg.

It was Niederhoffer's appetite for risk that led to his undoing in 1997 and the collapse of his former $130 million fund, which imploded when the Dow Jones Industrial Average plunged 554 points on Oct. 27, 1997. The selloff was sparked by a worldwide panic over an Asian currency crisis.

The fund, which heavily relied on margin to make its bets, got caught on the wrong side of those trades and couldn't get out of those positions fast enough. The fund collapsed when Niederhoffer couldn't come up with the money to pay down the margin calls from his broker.