Meet the quant hedge fund manager who's killing it this year

Roy NiederhofferBloomberg TVRoy Niederhoffer

Quant hedge fund manager Roy Niederhoffer, the founder of New York-based R.G. Niederhoffer Capital Management, is off to a tremendous start in 2016.

The $731 million Niederhoffer Diversified Offshore Fund is up 18.71% through February 10, according to performance data compiled by HSBC.

Meanwhile, the average hedge fund is down -4.53% this year, according to data from Hedge Fund Research.

It’s a horrible start for hedge funds in general, and follows a brutal year in 2015, with the average fund falling -3.64%, HFR’s data shows.

Niederhoffer’s fund also had a good year in 2015, ending up 4.32%.

The fund’s gone through some rocky periods in the last five years though, slipping 16.7% in 2011 and falling 22.39% in 2012, according to the HSBC performance data.

Over the last twenty years, the fund has posted annualized returns of 6.17%.

The computers are winning

Niederhoffer, 49, is part of the group of hedge funds called managed futures funds or commodity trading advisers (CTAs). CTAs are having a killer year, with the average fund tracked by HSBC up 5.5% this year.

Most CTAs are defined as trend following, meaning they use quantitative models and invest in financial futures across currencies, stocks, bonds, and commodities. Basically, they go long markets that are going up and short markets that are going down. Many CTAs have been short, and with the markets selling off they have done well in January.

Niederhoffer is different from most CTAs though. He’s not a trend following CTA.

He explained this in a recent interview with former hedge fund manager Niels Kaastrup-Larsen’s podcast “Top Traders Unplugged”

“…I think there’s been a difficulty in explaining trend following, why it should work. Everyone knows (or I should put “knows” in big quotation marks) that stocks rally and that companies get better over time at producing earnings and therefore there should be this upward bias in equities. It’s not quite so obvious why there should be a tendency of a market move once it’s established itself to continue in that same direction. I think in fairness, we all, in the CTA world, have been a little bit lax in providing the fundamental explanations for why this strategy should work. In my case, we really have gone in a different direction from most CTAs, and I always say that our correlation to CTAs which has been about .1 historically, makes us more different from CTAs than CTAs are from hedge funds and equities and pretty much everything else out there. We certainly trade the same things that most CTAs trade.”

Niederhoffer employs a short-term trading strategy. He also said on the podcast
that his strategy does better when there’s volatility and stocks are going down:

“…the strategy that we employ has a very specific intent which may distinguish it from many other things out there. We are trying to combine both interesting standalone returns with very, very consistent downside protection for people’s portfolios in equities, traditional investments overall and also alternatives. What we try to do is maintain a consistent negative correlation to equities. In other words, we do better than average when equities are having trouble, and there’s a lot of volatility. Typically when portfolios that most people have are having their toughest times, our strategy’s actually tuned not to maximise our own sharp ratio, not to maximise our own risk-adjusted return, but actually to maximise the risk-adjusted returns of our clients.”

Niederhoffer, who developed an interest in computers as a kid, graduated magna cum laude from Harvard in 1987 with a degree in computational neuroscience.

After college, he worked for his older brother, Victor Niederhoffer, the famous quant trader. In 1993, he launched his hedge fund firm.

Aside from investing, he’s talented in other areas of his life. He’s a violin player with the Park Avenue Orchestra and he’s played in Carnegie Hall and Avery Fisher Hall. He’s also on the board of The Harmony Program, a nonprofit that provides music programs to children in underserved areas.

He was also involved in saving the New York City Opera after it went bankrupt in October.

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