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Gray Monday's First Casualty: Famed Soros Confidant Victor Niederhoffer
By Dan Colarusso
Staff Reporters
10/29/97 8:23 PM ET
Famed speculator Victor Niederhoffer played the same games everyone else did -- but he always played bigger. As a student of trading, he worked under George Soros; he regularly challenges grandmasters in chess and checkers; he's won repeated titles as a national squash champion. As an international futures trader, he regularly wagered hundreds of millions of dollars on margin. And on Monday, Oct. 27, 1997, he lost.
Big time.
Niederhoffer's three hedge funds, Limited Partners of Niederhoffer Intermarket Fund L.P., Limited Partners of Niederhoffer Friends Partnership L.P. and Niederhoffer Global Systems S.A., were wiped out Monday as losses estimated at $50 million to $100 million claimed the first high-profile victim of the market swoon.
TheStreet.com has obtained a letter addressed to Niederhoffer clients in which he writes: "Right now the indications are that the entire equity positions in the funds has been wiped out." Acknowledging his propensity for risk, the memo added that "this time we did not succeed, and I regret to say that all of us have suffered some very large losses."
According to the letter, Niederhoffer's losses came as a result of speculative bets on S&P 500 puts, and he was among several big traders to get tagged with huge losses, according to a source on a Chicago trading floor. Curiously, a standard bet on puts Monday would have proved prescient. Possibly, one trader said, Niederhoffer had started going long by writing puts during last week's weakness. That would have become a dangerous and costly trade on Monday as markets screamed lower. Another trader thought Niederhoffer had made bets based on volatility that had gone terribly awry. Niederhoffer's funds have been working with its brokers since Monday evening to meet obligations, according to the memo.
According to hedge fund tracking service Daniel B. Stark & Co., Niederhoffer was up to $120 million under management in late July, but then the Thailand baht was destroyed on the currency markets -- a bad event for Niederhoffer. Other Asian currencies dropped like dominos, and Niederhoffer suffered a $50 million loss, according to published reports. Then, just as quickly, sources say he climbed out of the hole, making it all back by mid-October. He had $70 million under management by the end of September -- up 27%, or $19 million, for the month. His funds have always been volatile, but never like this.
Refco, the futures commission merchant through which the funds traded, may find itself responsible for a portion of those losses; sources are putting that figure as high as $35 million. In published reports earlier Wednesday, Refco executives said the firm was in "fine shape" and denied that any trading losses were causing problems.
As Niederhoffer sorts through his funds' situation, Wall Street will recall the trader's more colorful aspects. He trades barefoot, makes the National Enquirer required reading for this staff, insists that his fellow traders learn to play chess and checkers at a master level, and never has sex right before a big trading day. (Must've been a long weekend.) He gathered this eccentric collection of theories in a 444-page tome called The Education of a Speculator (Wiley & Sons) that was the publishing world's sleeper hit of the year.
Niederhoffer declined to comment for this story.
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Hot Copy: Straight From The Fax Machine, Niederhoffer Tells Customers The Bad News
By
10/29/97 6:13 PM ET
The following unsigned letter was faxed to clients of Victor Niederhoffer on Wednesday, October 29, 1997 after 5:00 p.m. EDT:
October 29, 1997
To:
Limited Partners of Niederhoffer Intermarket Fund, L.P.
Limited Partners of Niederhoffer Friends Partnership, L.P.
Shareholders of Niederhoffer Global Systems, S.A.
Dear Customers:
As you no doubt are aware, the New York stock market dropped precipitously on Monday, October 27, 1997. That drop followed large declines on two previous days. This precipitous decline caused substantial losses in the fund's positions, particularly their positions in puts on the Standard & Poor's 500 Index. As you also know from my previous correspondence with you, the funds suffered substantial losses earlier in the year as a result of the collapse in the East Asian markets, especially in Thailand.
The cumulation [sic] of these adverse developments led to the situation where, at the close of business on Monday, the funds were unable to meet minimum capital requirements for the maintenance of their margin accounts. It is not yet clear what is the precise extent (if any) to which the funds' equity balances are negative. We have been working with our broker-dealers since Monday evening to try to meet the funds' obligations in an orderly fashion. However, right now the indications are that the entire equity positions in the funds has been wiped out.
Sadly, it would appear that if it had been possible to delay liquidated most of the funds' accounts for one more day, a liquidation could have been avoided. Nevertheless, we cannot deal with "would have been." We took risks. We were successful for a long time. This time we did not succeed, and I regret to say that all of us have suffered some very large losses.
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