A Quant Who Won Big in the 2008 Crisis Is Back With a 45% Gain

(Bloomberg) -- The pandemic roller coaster is reviving the fortunes of a long-suffering quant trader who last won big in 2008.

After shedding assets amid lackluster returns through much of the decade's stock bull run, Roy Niederhoffer's Diversified Fund has gained 45% this year through September -- set for its best year since a 57% return notched in the global financial crisis.

With a systematic program riding wild swings across futures markets, the virus mayhem is giving bragging rights to the 27-year-old fund which has long struggled in one-way bull regimes. Just last year, it lost 27%.

“We've scrupulously avoided the long fixed-income trade as well as the long-equities, short-volatility trade that so many hedge funds have made so much money on,” said Niederhoffer, founder of the eponymous money management firm which oversees $333 million. “That's been both a blessing and a curse. This year, it's a blessing.”

The fund, which seeks to exploit behavioral quirks in markets, trades short-term momentum and mean-reversion strategies.

Being long price swings has been a winning strategy in the market downturn while bonds have proved a less-reliable hedge, according to the manager who is famous for turning around the financial fortunes of the New York City Opera in 2015.

Last month, when volatility resurged amid a selloff in tech stocks, was the fund's best in 2020.

“The only way to provide protection in 2020 was to be accurate in capturing the large volatile moves directly in the equities markets,” he said on a video call from his home office in Stratton, a ski town in Vermont.

Flanked by a keyboard and double bass which he is trying to master, Niederhoffer fears the end of the bond bull run would hurt his fellow Commodity Trading Advisors, a regulatory term for futures speculators. With yields this low, the thinking goes that Treasuries have less capacity to eke out gains during stock downturns.

“It may be that every time there is a further decline in equities, there will be an expectation that central banks will have to step in and increase the size of their balance sheet and potentially trigger inflation going forward,” he said. “Long fixed income in general has a downside risk that it didn't have before.”

After the relentless flattening of yield curves, CTAs also may struggle to make money by rolling one Treasury future to the next, a once-reliable source of profits.

Still, the manager sees a new market corner that's potentially ripe for trend-following quants: Foreign exchange. While the volatility of the asset class has been muted over the years, all that may be about to change as a by-product of unprecedented monetary intervention in debt markets.

“That's going to be the saving grace for CTAs: big currency trends,” he said.

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