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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So, What About Puts?
I read your introduction to equity options, and I understand calls.
Now, how do I use puts in a bearish market? If you are supposed to sell covered calls to be safe, what do you do for puts?
Puts are contracts to sell shares at a future date. Are they used in conjunction with short-selling to lock in a higher price today compared with, say, 45 days from now? Then you cover by exercising the put 45 days from now? This seems more complicated for the average investor than the covered call and probably just as risky as a naked call.
Hey, and didn't a famous, longtime investor get burned last summer by buying puts? If I have something confused here, please let me know.
-- Mike Morales
Mike,
You're making things a bit more complicated than necessary.
Puts are options that let you sell shares at a certain price by a certain date. They are used to profit from a downward move in a stock. That much, we can agree on.
How best to use them? There are two ways. Since owning puts is a short position already, you don't need to do it in conjunction with shorting stock.
What you would typically do is buy puts on stocks you already own. Doing this guarantees your exit price and cushions you from any continued slump in the shares. Owning the shares also provides you with stock to deliver if you want to exercise your puts at expiration.
Your other alternative, if you want to play the short side of a stock, is to buy the puts and be sure to sell them back before expiration. By that time, if the stock has fallen, the price of the put should have appreciated enough to make you happy and to provide a profit.
The famous investor you're thinking of is Victor Neiderhoffer. He took a bath selling S&P puts against a market that was plummeting. Selling puts is a long strategy, not a short one, and that's what did him in when the market crashed.
also from TSC
so you are right patrick, that he had sustained losses earlier in the year in the Baht.
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