What risk management mistakes did Victor Niederhoffer make to blow up a few times?

[Mtrader]

It is really hilarious how people try to find any excuse but their own fault to explain why they lost hugely.

Even on this site people tell a lot of nonsense.

An example:

• Person X says: I make consistently more than 50% a year.
• Bashers on ET reply: impossible nobody ever did it before. And it would make you own the whole world.
• Person X tells: I limit my positions so I will never be the richest man in the world. But I will never lose everything. I will live in the upper middle class.

Who makes now the biggest mistake? Person X or the bashers?
The bashers. Because if you always risk all your money you will one day meet the mother of all losses. It was proven 2 times by Niederhoffer.

He made several mistakes:

• Viktor took a position far to big to liquidate if necessary, he could not get out of the market anymore and had no financial reserves anymore. Already 2 big mistake for which only he was accountable.
• When he was winning he never thought about the people who lost because of his winning (someone has to pay the bill). But when he was in a weak position and losing he wanted the bank to help him for free and save his profits by giving him more time, which means the bank should take over the risk and Viktor would take the profits if there were any. If eventually the deal would turn out dramatically only the bank would take an extra hit because Viktor already lost everything and could not lose more anymore. Viktor never had any sympathy for other market participants, I think he never would take over the risk from someone else and leave all the profits for the other person, or give back some of his profits to reduce the losses of others.

In a lawsuit that Niederhoffer later filed in the U.S. District Court for the Northern District of Illinois against the Chicago Mercantile Exchange, where he tradedoptions, he alleged that floor traders colluded to drive the market down that day to force him out of his positions. Traders at the time said Refco may have been responsible for as much as $35 million of Niederhoffer's losses.

I know someone who was there when George Soros got mutilated on his Futures Contracts, a first hand version said the Pit stood back and allowed price to fall so deep, they dug in and made a fortune off Soros bad trade.

Viktor made good money for a long time. Many times markets move in a certain way because a lot of people sit on the wrong side and have to cover their position. Many of Viktor's profits will come from this kind of moves. So push everybody as deep as possible in an uncomfortable position is the way to go. Trading is war, everybody tries to steal other trader's money. Viktor made a lot of money from this, but when Viktor was in a weak position and other participants tried to put him as deep as possible in the sh*t he could not understand why they did this. If he does do this, why other's wouldn't do this? They did it with Soros too.

Although I beat Niederhoffer's performance every year over and over again (I mean the POSITIVE returns ),I will never become as rich as he ever was (maybe at this moment I even have more money then he has). But I will never end up like he did 2 times, losing almost everything he had. Selling silver wear and take a mortgage on his house....

I limit my trading according a number of rules:

• I should be able to close any position I hold within minutes. So nobody can put me in a corner and kill me financially.
• My position should always be in line with the liquidity (volume).
• On regular times I put a big part of my profits away to protect me against any disaster.
• I should always be able to double my account immediately if necessary (margin calls).
• I should always be able to wipe out my account three times in a row and still have enough money to start over again immediately.

All these rules come at a price, but they also have big advantages:

• I will never be extremely rich but live in the upper middle class.
• I will never lose all I have, I will never to give up my "upper middle class life".
• I will never have to watch TV screens while eating or playing tennis or swimming or going on holiday and get overstressed, hang on the phone all the time to solve all the problems that occur.
• But these rules will also limit the growth of my trading capital.

So I will never live a ratrace. What's the use of making billions and give up a good life if you can live a superb, relaxed life without any financial problems and even make enough money for the next generation of your family?
I don't need 5 mansions all over the world, a private plane or a yacht. I should have to give up to much quality of life.

From the reactions I read on ET I concluded that most people here are still in the stage that making money is the most important thing in their life. It is only the most important thing because they don't have enough money to live comfortably, if they would have, their priority would change and money would not be number 1 anymore.

 

[marketsurfer]

MS, did you ever hear about VN being the first chink in Refco's armor? For newbies they can look up Refco and MF Global, interesting counter from Victor showing his fund had nothing to do with Refco, their own incompetence. On Wall Street more lies and myths gain traction than truth, here's a very intriguing article by Victor. I never heard the Refco and Victor Neiderhoffer myth before today.

http://www.dailyspeculations.com/vic/refco.html

Edited for a small sample, wet your appetite to read this article, its well worth your time seeing how people lie so much in finance and corrupt blaming their blunders on anyone but the real culprits.

"
10/27/2005
Calling it a Day

No matter how much detail I go into to show that Refco's association with my firm in 1997 was not a link in its debacle, someone, somewhere, is going to allude to some anonymous source saying something to the effect that Refco's problems started with losses they suffered with me in 1997. The latest was an Oct. 27 Bloomberg story saying that someone said that Refco suffered $35 million of losses relating to the settlements and agreements we came to in 1997. Not mentioned is the offset provided by the value of all the assets turned over to them by me and my funds. Worse yet, just having my name linked with Refco is enough for 99.9% of the public to think that there is some substance to the idea that unbeknownst to me they hid their losses with me, and that somehow this morphed into massive losses and debts that killed the firm eight years later."

I believe VN over Refco, his version is sounder than someone using Refco as their own $1 billion dollar ATM, liars continue attacking VN, a special place awaits jerks like that!






http://www.thestreet.com/_googlen/funds/supermodels/10249654.html

I only know what i read, just like you in this regard. Your other questions are personal and i am not going to comment. peace, Surf

 

[RabidTrader]

The moral of the story is to keep a balanced position of cash to equity, a quality very few of us can actually implement since we all want to secretly own the World without anyone noticing we perfected trading


Mtrader, your insights are true, how many traders I've met who say they make $25k a day because they don't want to raise suspicion with their Brokerage or Clearing House having them piggy back on their Edge only to lose it. I met about twenty such fellows and out of fifty(I only met twenty out of the fifty) only one is consistently making over $5+ million on his own account. He recently returned all monies to his clients and decided "the hell with them, I am going to keep my gains for myself." he also has gone back to Day Trading since May 2015 or Overnight to Three-Day holdings because the Market's visibility has become more muddy. That's why he's more than I will ever be, he is one of the most disciplined traders and fire's people that refuse to close out positions after making good gains. He's 46 years old, been trading since he was a teenager, keeps cash-balance at 30% at all times and since May 2015 moved it to 55% and only day trades like I said with his team of five smart analysts working underneath him. The bulk of this trader's wealth was made by investing in Chinese Pipes at the turn of the Millennium, so he can relate to VN's demise. I enjoyed your post, good writing!

 

[Mtrader]

The moral of the story is to keep a balanced position of cash to equity, a quality very few of us can actually implement since we all want to secretly own the World without anyone noticing we perfected trading


Mtrader, your insights are true, how many traders I've met who say they make $25k a day because they don't want to raise suspicion with their Brokerage or Clearing House having them piggy back on their Edge only to lose it. I met about twenty such fellows and out of fifty(I only met twenty out of the fifty) only one is consistently making over $5+ million on his own account. He recently returned all monies to his clients and decided "the hell with them, I am going to keep my gains for myself." he also has gone back to Day Trading since May 2015 or Overnight to Three-Day holdings because the Market's visibility has become more muddy. That's why he's more than I will ever be, he is one of the most disciplined traders and fire's people that refuse to close out positions after making good gains. He's 46 years old, been trading since he was a teenager, keeps cash-balance at 30% at all times and since May 2015 moved it to 55% and only day trades like I said with his team of five smart analysts working underneath him. The bulk of this trader's wealth was made by investing in Chinese Pipes at the turn of the Millennium, so he can relate to VN's demise. I enjoyed your post, good writing!

Thanks for the compliment. I just wrote about my personal experiences after a few decades of trading.

 

[marketsurfer]

It is really hilarious how people try to find any excuse but their own fault to explain why they lost hugely.

Even on this site people tell a lot of nonsense.

An example:

• Person X says: I make consistently more than 50% a year.
• Bashers on ET reply: impossible nobody ever did it before. And it would make you own the whole world.
• Person X tells: I limit my positions so I will never be the richest man in the world. But I will never lose everything. I will live in the upper middle class.

Who makes now the biggest mistake? Person X or the bashers?
The bashers. Because if you always risk all your money you will one day meet the mother of all losses. It was proven 2 times by Niederhoffer.

He made several mistakes:

• Viktor took a position far to big to liquidate if necessary, he could not get out of the market anymore and had no financial reserves anymore. Already 2 big mistake for which only he was accountable.
• When he was winning he never thought about the people who lost because of his winning (someone has to pay the bill). But when he was in a weak position and losing he wanted the bank to help him for free and save his profits by giving him more time, which means the bank should take over the risk and Viktor would take the profits if there were any. If eventually the deal would turn out dramatically only the bank would take an extra hit because Viktor already lost everything and could not lose more anymore. Viktor never had any sympathy for other market participants, I think he never would take over the risk from someone else and leave all the profits for the other person, or give back some of his profits to reduce the losses of others.

Viktor made good money for a long time. Many times markets move in a certain way because a lot of people sit on the wrong side and have to cover their position. Many of Viktor's profits will come from this kind of moves. So push everybody as deep as possible in an uncomfortable position is the way to go. Trading is war, everybody tries to steal other trader's money. Viktor made a lot of money from this, but when Viktor was in a weak position and other participants tried to put him as deep as possible in the sh*t he could not understand why they did this. If he does do this, why other's wouldn't do this? They did it with Soros too.

Although I beat Niederhoffer's performance every year over and over again (I mean the POSITIVE returns ),I will never become as rich as he ever was (maybe at this moment I even have more money then he has). But I will never end up like he did 2 times, losing almost everything he had. Selling silver wear and take a mortgage on his house....

I limit my trading according a number of rules:

• I should be able to close any position I hold within minutes. So nobody can put me in a corner and kill me financially.
• My position should always be in line with the liquidity (volume).
• On regular times I put a big part of my profits away to protect me against any disaster.
• I should always be able to double my account immediately if necessary (margin calls).
• I should always be able to wipe out my account three times in a row and still have enough money to start over again immediately.

All these rules come at a price, but they also have big advantages:

• I will never be extremely rich but live in the upper middle class.
• I will never lose all I have, I will never to give up my "upper middle class life".
• I will never have to watch TV screens while eating or playing tennis or swimming or going on holiday and get overstressed, hang on the phone all the time to solve all the problems that occur.
• But these rules will also limit the growth of my trading capital.

So I will never live a ratrace. What's the use of making billions and give up a good life if you can live a superb, relaxed life without any financial problems and even make enough money for the next generation of your family?
I don't need 5 mansions all over the world, a private plane or a yacht. I should have to give up to much quality of life.

From the reactions I read on ET I concluded that most people here are still in the stage that making money is the most important thing in their life. It is only the most important thing because they don't have enough money to live comfortably, if they would have, their priority would change and money would not be number 1 anymore.

All sounds good but you may be nothing but an anonymous 3rd world dreamer -- whereas niederhoffer is a proven entity with a verifiable track record. Sorry, no comparision.

surf

 

[RabidTrader]

Last year one of the kind members on Elite posted a video about a rich Trader who decided he would pony up the capital to for several newbies in the United Kingdom and teach them how to trade. If you recall almost nobody who joined his firm made any money and realized how hard it is to sit behind four to eight monitors all day long. Its a lonely life unless you enjoy the peace and solitude this lifestyle offers the offsite trader.


Was anyone here surprised how badly those traders fared or did you expect them to fail because they had no real life experience or months if not years of back-testing their methods. I feel stupid because I don't have years of back-testing methods, all I've done is follow the same stocks over the last thirty plus years as a mini-specialist and when I deviate from my method, I get slammed against the wall for being so stupid.


I thought VN knew when some big fish like himself was entering his area of trading, the way we know there's someone or some big buyback attacking our stocks like Apple, CMG, NFLX, AMZN or selling like WFM, SFM and TFM. People don't realize our sitting in front of these monitors counts as value, there's a story about a business calling out a profession to fix a machine of theirs, it's a machine that's very expensive to fix and they can't afford any downtime so getting it fixed is utmost urgent.


The manager of the business awaits a late fifties to early sixties man, he knows surveys this machine and after twenty minutes begins working on it. The bill after one hour of time is $2500, the manager is outraged because it's only costed $200 in parts, "how can this be so high he laments to himself?" The skilled man say's "Your bummed right? You want to know why the bill is so high?" The manager say's "Hell Yes!". Ok, your paying $200 for parts and $2300 for forty years of training!" These skills come after decades of learning to find what's wrong with our equipment, your paying for my know how!"


I know there are traders who have mixed emotions making large sums of money in short periods of time because there are traders on Elite Trader who post and others that read who make more money in one week than many of us can make in a year, if not more! They deserve every cent they make because their professionals providing more liquidity than HFTS or nasties not posting their Bid/Ask. That's my humble opinion, we have some great traders here and they right great articles and you can tell by their writing they know how to turn that machine and make that proverbial $2300 a hour for "know how" skills!

 

[Mtrader]

All sounds good but you may be nothing but an anonymous 3rd world dreamer -- whereas niederhoffer is a proven entity with a verifiable track record. Sorry, no comparision.

surf

Indeed, his 2 massive blow ups were recorded. I could not achieve something comparable.
I can be a dreamer or I can be real. But as always you only mention the option that suites your story the best. Objectivity is not your strongest point.

 

[Mtrader]

If you make 20 years 30% a year and after that blow up, the total return is -100%.

If I would have invested 20 years in this system I would have lost all my money by letting it being managed by the best trader in the world. The trader with the best track record ever, but the final result is a total loss for me as client.

Return comes at a risk, the risk was out of proportion. This was confirmed TWO TIMES in a row in a short period.

If we speak about track records we should take the complete track record and not only the good parts and delete the bad parts. Especially leaving out two complete wipe outs will not give what we call an objective overall result. I also have worldrecord breaking returns some days every year.
Somebody who would always have been invested in Niederhoffer would have lost twice all his money. Those who witdrew some money (this is what I would do) were the lucky ones, but even then their return would never be the return that is mentioned everywhere, because even these investors would have taken a partial big hit.

 

[ktm]

Last year one of the kind members on Elite posted a video about a rich Trader who decided he would pony up the capital to for several newbies in the United Kingdom and teach them how to trade. If you recall almost nobody who joined his firm made any money and realized how hard it is to sit behind four to eight monitors all day long. Its a lonely life unless you enjoy the peace and solitude this lifestyle offers the offsite trader.


Was anyone here surprised how badly those traders fared or did you expect them to fail because they had no real life experience or months if not years of back-testing their methods. I feel stupid because I don't have years of back-testing methods, all I've done is follow the same stocks over the last thirty plus years as a mini-specialist and when I deviate from my method, I get slammed against the wall for being so stupid.


I thought VN knew when some big fish like himself was entering his area of trading, the way we know there's someone or some big buyback attacking our stocks like Apple, CMG, NFLX, AMZN or selling like WFM, SFM and TFM. People don't realize our sitting in front of these monitors counts as value, there's a story about a business calling out a profession to fix a machine of theirs, it's a machine that's very expensive to fix and they can't afford any downtime so getting it fixed is utmost urgent.


The manager of the business awaits a late fifties to early sixties man, he knows surveys this machine and after twenty minutes begins working on it. The bill after one hour of time is $2500, the manager is outraged because it's only costed $200 in parts, "how can this be so high he laments to himself?" The skilled man say's "Your bummed right? You want to know why the bill is so high?" The manager say's "Hell Yes!". Ok, your paying $200 for parts and $2300 for forty years of training!" These skills come after decades of learning to find what's wrong with our equipment, your paying for my know how!"


I know there are traders who have mixed emotions making large sums of money in short periods of time because there are traders on Elite Trader who post and others that read who make more money in one week than many of us can make in a year, if not more! They deserve every cent they make because their professionals providing more liquidity than HFTS or nasties not posting their Bid/Ask. That's my humble opinion, we have some great traders here and they right great articles and you can tell by their writing they know how to turn that machine and make that proverbial $2300 a hour for "know how" skills!

It's true. Many of the high return/high dollar guys that I know keep the scale down a bit to keep things flowing. It's always a risk. I don't know if the broker would hijack it - maybe a few would and that's always something to consider. The bigger risk for me is always that someone that worked for you would run off with it, bastardize it and try to own the world and ruin the setup. There's always one or two that can't seem to "keep their pants on" and be patient - try to ID those guys and don't hire them.

The other issue that VN had - that's true with many/all of the highly profitable strategies that work well - is that they do not work all the time. There may be a time where you have to go to cash and sit out instead of trying too hard. VN probably should have cashed out when the VIX hit 20-25 or some predetermined number. Take the small losses and return with your pile another day when the market has returned to a normal environment. I just don't think you can run anything 100% of the time and keep it profitable...not with some of the gyrations we go through every few years.

 

[marketsurfer]

If you make 20 years 30% a year and after that blow up, the total return is -100%.

If I would have invested 20 years in this system I would have lost all my money by letting it being managed by the best trader in the world. The trader with the best track record ever, but the final result is a total loss for me as client.

Return comes at a risk, the risk was out of proportion. This was confirmed TWO TIMES in a row in a short period.

If we speak about track records we should take the complete track record and not only the good parts and delete the bad parts. Especially leaving out two complete wipe outs will not give what we call an objective overall result. I also have worldrecord breaking returns some days every year.
Somebody who would always have been invested in Niederhoffer would have lost twice all his money. Those who witdrew some money (this is what I would do) were the lucky ones, but even then their return would never be the return that is mentioned everywhere, because even these investors would have taken a partial big hit.

You are forgetting the important people in your idea-- the investors. VN's investors made far more than they lost overtime by investing with him. Remember, soohisticated investors often take their money out of strategies to reinvest annually or whatever -- yes, those who just happened to invest just around the drawdown times took a hit---- but you also need to remember that VN was likely less than 10% of anyone's total hedge fund allocation. We are not talking about folks with just the minimum million or whatever here. surf