http://online.wsj.com/article/SB115352546280214217.html?mod=hps_us_editors_picks One Trader's Way To Make Money: Pile On the Risk Niederhoffer Feels Echo of 1997 But Says He Learned a Lesson; A 'Chronic Bull' With 7 Kids By GREGORY ZUCKERMAN July 22, 2006; Page B1 Victor Niederhoffer is a noted money manager with some quirks. For instance, he keeps the thermostat in his trading room set so high, you can see the sweat beading up on his traders' brows. Recently, Mr. Niederhoffer has been feeling the heat in another way. The hedge-fund firm he runs, Manchester Trading LLC, took a beating in May, when stock prices swooned. That month alone, the fund lost about $100 million, or almost 30% of its assets. There was speculation -- though it proved to be unfounded -- that he might have to close his firm. "We never discussed or had any thought of closing operations," says Mr. Niederhoffer. It would have been a painful repeat of history for Mr. Niederhoffer: In 1997, he lost most of his personal savings after his previous hedge fund collapsed, partly under the weight of disastrous bets on foreign markets. That collapse made him a poster boy for overly aggressive investing. With his firm losing money this past May, Mr. Niederhoffer, 62 years old, scrambled to reassure his investors that this time his losses were manageable. He succeeded in steadying the firm, and says his ability to withstand the lashing -- not to mention the fund's annual returns of about 50% over the past three years -- are evidence he has learned from previous mistakes. Victor Niederhoffer trades at a 10-bedroom Connecticut chalet -- with a "no shoes" policy for all. "I had a bad May. I made some mistakes, that's regrettable," Mr. Niederhoffer says. "But one sparrow does not make a spring, and nor does one bad month." The losses continued in June, however, and Mr. Niederhoffer's largest hedge fund, Matador Fund Ltd., with about $250 million, was down 12% on the year through the end of June. That's worse than the gain of 4% for the Dow Jones Industrial Average through June and the 2% drop in the Standard & Poor's 500. Mr. Niederhoffer's challenges are a sign of the troubles of many big traders lately. Although the main market averages' losses haven't been huge, many successful investors built up gains in various global markets this year but have lost more than 10% in just the past two months. It's a reminder that Mr. Niederhoffer remains one of the most talented and volatile traders -- unable to kick fully the habit of a high-risk, high-reward investment style, even at a point in his career when others would turn more conservative. "I have complete trepidation about going under again. I have seven kids and I couldn't afford that," he says. "But I don't know how to make money without a lot of risk." The Brooklyn-born Mr. Niederhoffer, a former U.S. squash champion and the son of a New York City police officer, was one of the most acclaimed traders in the mid-1990s, at one point managing about $100 million for hedge-fund manager George Soros. In his memoir, "The Education of a Speculator," published in 1996, Mr. Niederhoffer recalled his many successes, but also cited his predilection for risk, including poor bets on the dollar, yen and other investments that threatened to put him under. "I am a speculator, and my daily bread depends on reversing big moves," he wrote. "When I hear the 'thunderous roar and hiss of escaping steam' from the market...I know it's time to jump in." By 1997, he was confident enough to move into foreign markets, such as Thailand. His timing was terrible. That was the year of the Asian economic crisis, which clobbered markets across the region. Making matters worse, he used borrowed money to invest, a strategy that can amplify gains -- but also deepen losses if the markets turn against you. Ultimately, his lenders forced him to close down. He had to sell treasured family jewels, such as a collection of antique silver, to raise cash. After several years working in obscurity, Mr. Niederhoffer in 2002 returned to investing for others, again embracing futures and options bets. Despite the hits he has taken, Mr. Niederhoffer returned to a strategy that does best when the market rises, a reflection of his view that stock markets generally climb over time and an optimistic perspective that is belied by his shy, cautious mien. "I guess you could call me a chronic bull," he says, dressed, as usual, in pastel-only colors, this time orange chinos and a yellow button-down shirt. As the market rose over the past four years, Mr. Niederhoffer topped almost all hedge-fund rivals. In 2002, his fund gained 3%, according to materials released to investors. The next year it was up 41%, in 2004 the fund gained 50% and last year it rose 56%. By way of comparison, the Dow Jones Industrial Average lost 17% in 2002, rose 25% in 2003 and 3% in 2004, and dropped less than 1% last year. Mr. Niederhoffer says he "made restitution" to investors who had lost money in his first fund. He formed a trading team including a former professional poker player, a hotshot stock trader just out of college, and several professors with mathematics backgrounds. His fund trades out of his 10-bedroom, Connecticut chalet situated on 13 acres of land, where, among his other quirks, he maintains a no-shoes policy in his trading room, reflecting an Asian influence. Mr. Niederhoffer says he doesn't use an air conditioner at his firm because it gives him a stiff neck. He discourages his traders from speaking aloud in the office -- they usually converse through email during the trading day, even when sitting nearby -- to try to develop a serious atmosphere. And he maintains a strict formality, addressing employees by their title and last name and referring to his right-hand man, Steve Wisdom, as "Mr. Wisdom." "I've adopted the traditions of the British Navy," he says, "It's important to keep emotions in check....At any moment disaster can strike." Mr. Niederhoffer has six older daughters from two marriages, and a recent newborn son from a surrogate mother. He plans to raise his new son with his girlfriend, a former business reporter. New investors have flocked in during the past two years and Mr. Niederhoffer cut down on the amount of borrowed money used to amplify his trading returns, though the hedge fund still borrows as much as three to six dollars for every dollar it manages, higher than most rivals. "There's apparently a competent method to his madness that has resulted in a splendid record over the history of his investing career, with the exception of the one disastrous blip a number of years ago," says Laurence Leeds, chairman of Buckingham Capital Management, a New York money-management firm who personally has invested for the past year in Mr. Niederhoffer's fund. "His methodology of investing is quite sophisticated and not one I particularly understand, however I believe strongly in Victor's intelligence and competence." Others remained wary of placing money with a manager who once went under, worried it could happen again. Mr. Niederhoffer says he makes it plain how volatile his trading style is. "When my friends ask if they should invest with me I say, 'No, it's too risky,' " he says. Mr. Niederhoffer was riding high earlier this year, up almost 30% by the end of May. Those gains encouraged him to become more aggressive, he acknowledges. Although Mr. Niederhoffer no longer dabbles in emerging markets, he still sells short-term "puts," or options that pay off if the market tumbles in a short period of time. When stocks started tumbling in May, these positions turned into losers. Mr. Niederhoffer trimmed his positions and reduced risk -- moves that some traders incorrectly suspected were signs he again was throwing in the towel -- to keep his losses manageable. As the end of a recent trading day, he was staring at his computer screen and urging quiet from other traders, hoping to make money in the final furious minutes. Mr. Niederhoffer accuses rivals of spreading rumors that he is down on his luck to make money on the other side of his trades and says he receives weekly emails from mutual-fund managers and others who are enjoying his travails and rubbing it in, he says. But he says his investors are sticking with him. His fund's gains in recent years "make the people on the other side of my trade envious, and hateful," Mr. Niederhoffer says. "That's what this is all is about."