The recent sub-prime mortgage mess that has roiled the US markets over the past few months is taking its toll across the board. The middle classes are seeing record home foreclosures, and the well heeled are also feeling the sting, with some forced to hock private planes, speed boats and vintage automobiles or risk complete financial ruin.
Hedge-fund manager and one-time master of the mortgage market John Devaney recently put his 142-foot Trinity yacht, Positive Carry, on the auction block for $24 million. He was also forced to sell his $16.5 million second home in Aspen, and an $11-million Sikorsky S76C helicopter. Meanwhile, in July, Jeff Larson, former head of Harvard University’s endowment, was forced to admit defeat and liquidate his hedge fund Sowood Capital, returning what little money was left to investors. And the list of losers goes on and on.
But the Devaneys and the Larsons of the world shouldn’t lose heart. If there is anything fallen Wall Street titans are famous for, it’s making a comeback. And thankfully for Devaney and Larson, who no doubt have more than a few bitter clients sticking pins into their voodoo-doll likenesses, Americans also have short memories.
One need look no further for inspiration than once high-flying money manager Victor Niederhoffer, who back in the early 1990s was considered one of the gutsiest, savviest, smartest speculators on Wall Street. From the early 1960s to the mid-1990s, Niederhoffer made hundreds of millions in the futures market for his clients, including his most famous patron, financier George Soros.
Then, on October 27th, 1997, Niederhoffer made what turned out to be a spectacularly bad bet on the Thai markets. Within hours, the Brooklyn-born son of a police officer saw his vast fortunes evaporate, and along with them, his business and his reputation. Some still blame Niederhoffer’s actions one decade ago for problems seen today at financial services giant Refco. It was Refco — best known as a commodities and futures broker—that issued margin calls forcing Niederhoffer to sell his holdings at huge losses that fateful autumn day. He vigorously refutes the charges as preposterous.
‘We made a mistake back in ’97 by in getting involved in illiquid markets,’ Niederhoffer explains, sitting at the dining room table on a chilly afternoon in his 20,000 -square-foot mansion in tony Weston, Connecticut. ‘That transgression was the root of all evil for us. We lost more than 100 per cent of our assets in our South-East Asian endeavours.’
Following those major losses and the collapse of his firm, Niederhoffer was forced to sell his silver collection — said to be the second best collection of American silver after the Metropolitan Museum — at auction at Sotheby’s. For a while he suffered from such a deep depression that his family put him on suicide watch.
‘It was a tough time for me,’ he says, folding his hands on his knee and looking down at his sock-clad foot. The memories still seemed to be raw. But the eccentric Niederhoffer, who doesn’t wear shoes inside his home and is known for dressing in bright colors, didn’t let depression win. After some major soul-searching, in which he drew on lessons learned during his years as a champion racquetball player — from 1965-1976 he was the undefeated national squash champion in the US, claiming the world squash title in 1976 — he decided to stage a comeback.
‘In sports, you do a lot of losing along the way. The greatest book ever written on racquet sports was by Rene Lacoste. He wrote that before every great improvement in his game, there was a loss.’
Niederhoffer took Lacoste’s musings to heart, applying his mantra to the dark period following the debacle in ’97. He mortgaged his house, rounded up his previous colleagues, and convinced them that they had to bootstrap themselves back into the money management game.
‘When you fail, the thing to do is to improve your basic ground strokes, your fundamentals,’ says Niederhoffer. ‘What we have is a niche. We have created a new method of predicting options prices and now, in addition to that, we have knowledge of the market making process that enables us to get the edge on every trade we put on.’
Niederhoffer explains that he developed his unique approach together with his right-hand man, Steve Wisdom (a.k.a. Mr Wiz), back in the 1980s. The two have continuously evolved and improved it.
‘After I regrettably led us into disaster in Thailand, I was able to convince my former partner Mr Wiz to come back with us and we were able to create what we consider to be the finest group of scientific speculators that has ever been amassed,’ he says in a slow, calculated voice. One quickly observes that Niederhoffer always thinks carefully before he speaks, no matter how mundane or casual the topic.
Wisdom, who along with everyone at Niederhoffer’s firm, Manchester Trading, addresses colleagues formally as ‘Mr’, explains that he never lost faith in Niederhoffer, and didn’t have to think twice about rejoining him.
‘After the wound had healed, he was battle hardened and had learned from the experience,’ he says. ‘Really, every day that he wasn’t trading was an opportunity left on the table.’
Over the past few years, Niederhoffer has once again emerged as one of the top performing commodity traders on the Street. While his silver collection may be a shadow of its former glory, he has amassed an enormous collection of American folk art, and he also has a penchant for collecting such things as antique toys and seashells. As for his personal life, he has two failed marriages behind him, which produced six children, all girls. He is now embarking on his third, and together with his new partner, financial journalist Laurel Kenner, is raising his seventh child, a long awaited son.
After speaking at a conference in Europe recently, one attendee came up to Niederhoffer and said, ‘We really admire you for coming back because you represent what America is, and in America they give you a second chance.’