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Alternative Market Briefing

Niederhoffer, as usual, maintains strong performance in tough period

Friday, October 28, 2022

Roy Niederhoffer
B. G., Opalesque Geneva:

The R. G. Niederhoffer Diversified Program is up 75% YTD, demonstrating clearly that well researched behavioural finance can be a boon in these difficult times - if you add two-sided tail-risk protection, founder Roy Niederhoffer says, as these times are not just difficult but also different.

Niederhoffer will speak at Opalesque's next webinar, Winter is Coming, on 2nd November (details below).

Downside protection in an inflating world

One of the topics he will tackle in his discussion with well-known financial editor Michelle Makori is the use of downside protection.

"In 2022, investors have faced a catastrophic simultaneous decline in equities and fixed income, turning previously-diversified 60/40 or 50/50 portfolios into exploding land mines as Central Banks fight inflation with rapidly tightening monetary policy," Niederhoffer tells Opalesque. "Since many of our product offerings aim to provide a combination of absolute return and consistent downside protection for equity and fixed income portfolios, I have spent a lot of time in prior years discussing how these elements can combine to improve existing multi-strategy holdings."

But this time might be different, he continues, as with the massive expansion of Central Bank balance sheets since 2008, especially in the last couple of years, "the prospect of currency debasement and devaluation must be considered not just as an arcane post-world-war artefact or emerging-market curiosity, but as genuine tail risk for developed markets." Indeed, it is currency debasement, rather than equity bear markets, that is the true extinction risk for wealth.

This is why the manager makes sure that his funds provide two-sided tail-risk protection, as underperforming on the upside in a rally because of overhedging could be just as tragic, if not worse than failing to hedge the downside in a crash.

"Consider what a typical long-short equity hedge fund with a 0.3 Beta to the stock market might have done in 2000s Zimbabwe, or 1920 Austria," he adds. "With nominal gains of many orders of magnitude, failing to achieve positive convexity could be disastrous. Owning puts isn't enough - in stocks or bonds. Because no one knows which of the four tails will occur. And we might get more than one. Or even more than two."

It will be interesting to see if the historical tendency of equity puts to trade higher than equity calls will reverse during inflationary times. He suggests the stock options market of 2024 may end up looking like the bitcoin options market of 2021 when it was calls over.

"Keep an eye on this," he says, "and remember that this may be an accurate reflection of a new regime in stocks where, unlike the last 35 years, volatility increases as stocks rally, not when they decline. Without the Fed Put, we're in a new world!"

Volatility and stock markets

Recent research has found that higher volatility corresponds to a higher probability of a declining market, while lower volatility corresponds to a higher probability of a rising market.

But in this year's "epic" bear market, which trashed the fixed-income market and lost the S&P 500 over a fifth of its value, stock market volatility has remained low. The Vix volatility index hasn't gone over 40 points all year and has generally fluctuated around the 25-35 point mark it currently occupies - not far from its long-run average of about 20 points, reported the Financial Times a few days ago. The European Vstoxx vol index was high in March but is now even lower than the Vix. "Both volatility indices are significantly higher than in the becalmed pre-Covid days, but are still low given the financial backdrop." The remarkable orderliness of this year's bear market can be partly explained by the fact that most institutional investors and fund managers have been ready for it since late last year, says the paper.

The Program

The R. G. Niederhoffer Diversified Program runs a systematic, short-term trading and contrarian strategy that uses more than 30 years of research into how cognitive biases affect financial markets.

Class N of the Diversified Program was launched in July 1993 and has annualised 8.9% from January 2000 to September 2022 with an annualised volatility of 19%. The program manages $409m in assets and is currently available as a managed account.

The program is managed by Roy Niederhoffer, who graduated magna cum laude from Harvard in 1987 with a degree in Computational Neuroscience and founded R. G. Niederhoffer Capital Management, Inc. in 1993, and Paul Shen, CIO and head trader for the firm since the beginning, who previously worked at Comex, Nymex and NCZ Commodities. The firm is currently based in Florida.

Upcoming webinar:

Winter is Coming: Billion-dollar hedge fund manager with decades of experience can prepare you for the storm

When: Wednesday, November 2nd, at 11 am Eastern Time (ET), 3 pm London, 4 pm CET.

Join us as incisive star financial editor Michelle Makori takes you inside the mind of controversial hedge fund manager Roy Niederhoffer for a live Q&A as he shares colourful stories of his 35 years of trading, predictions of what lies ahead, and his views on best practices for multi-strategy portfolios.

Free registration:

Related article:
27.May.2022 Opalesque Exclusive: As volatility ramps up, one firm takes advantage of investor bias

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