Niederhoffer Trades Against The Trends, Moonlights At The Met

Sep 30 2006 | 9:14am ET

By Kate McGregor 

R.G. Niederhoffer Capital Management has added another fund to its roster, which means founder Roy Niederhoffer is busier than ever. To keep up, the space behind his desk is covered with half-a-dozen market-tracking computer monitors, which he can view from any part of his office, including the seat at his grand piano and the lounge area where he conducts most of his meetings.

 During a recent interview, he kept tabs on the markets while discussing his firm’s strategy.

Niederhoffer, 40, who founded the firm in 1993 after a stint working for his brother, Victor Niederhoffer, the well-known futures and options trader, said the newest fund, TrendHedge, is a natural extension of the firm’s original mission statement: to be a true diversification hedge fund.

The fund, launched on June 1, is a short-term trading strategy and Niederhoffer declined to comment on specific investments. Sladja Carton, executive managing director, noted that the fund is trading as normal, with the firm “hoping that the volatility of underlying markets will increase a little bit to our advantage.”

The newest fund is meant to complement a product lineup that includes the Negative Correlation Fund, which provides a hedge against equity exposure, Ireland I and Ireland II, diversified domestic and international programs, the R.G. Niederhoffer Global Fund, a global offering and Optimal Alpha, a pure alpha product.

The funds have each posted positive returns for the year though August. TrendHedge is up 14.2%; the Ireland I is up 13%; R.G. Niederhoffer is up 10%; Ireland II is up 14%, Negative Correlation is up 2.7% and Optimal Alpha is up 6.9%.

“TrendHedge begins with a model of CTA’s and what they are doing,” Niederhoffer said. “We’re able to identify what extreme CTA’s are doing and emphasize that opportunity.”

The latest fund has approximately $50 million in assets under management. The minimum investment is $1 million for quarterly liquidity, and $10 million for daily liquidity. Of the $50 million, most of it is in the daily liquidity share class. Fees for management are 2.75% and 24% for performance. All the funds offer daily liquidity to investors, many of whom are taking advantage of the “not having a lock-up and being able to get out quickly,” Carton said.

Niederhoffer, who is a classical pianist, says the fund works best when there are strong reversals after a trend peaks and when the markets are no longer “trendy.”

“We emphasize trades against trend followers,” said Niederhoffer, who can often be seen moonlighting at Carnegie Hall or the Met, “especially with the recent relative underperformance of trend followers.”

If this sounds complicated, it is. Intricate trading techniques are Niederhoffer’s passion, a byproduct of his background in computational neuroscience, which he said enables him to apply a scientific approach to the markets.
“It teaches an effective use of statistics, gives an appreciation of which models worked historically, and helps you understand these aren’t the only [models to follow] in the future.”

Given this, Niederhoffer says he runs the firm “very much in the manner of the experimental abstract,” with managers and partners expected to hold contrary viewpoints and think outside the regular conventional wisdom of futures trading.

“Trading has a basic instinct and conceptual characteristics that are part of [our] hardwire,” he said. “People apply physics to the markets but they don’t trust them. We specialize in the way the brain is wired and how that influences behavior.”

The approach seems to be working. Niederhoffer started the firm 13 years ago “with a few million dollars” at a time when “everyone said trend following was dead.”

Now the firm has 29 employees and $420 million assets under management. This spring, the firm made Barrons’ list of the top 100 CTAs, an achievement that is certainly aided by the firm’s use of its own proprietary algorithmic trading system.

“The algorithmic platform lets us get there,” he said. “We buy futures contracts using the best possible technology.”

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