The Quantum Pontiff

Winners and Loser Among Hedge Funds

When sky’s fall, apparently they do not fall equally everywhere (contrary to popular theory.) A partial is of those who’ve held up the sky (and even pushed higher) in this New York Times article:

Bernard V. Drury is a rarity on Wall Street: a hedge fund manager who is making money rather than losing it.

While most hedge funds are sinking into red this year and unsettling the markets in the process, a handful of them are posting spectacular gains. Mr. Drury’s fund, for instance, is up 60 percent since Jan. 1.

How did he do it? Mr. Drury, a former grain trader, is not giving away his secrets. He relies on proprietary computer models to chart tides in the markets and to ride the prevailing currents.

Being a successful trader is often like being a good error correcting code: don’t want to reveal any information from local prying eyes!

And a great line at the end of the article:

Roy Niederhoffer, founder of R. G. Niederhoffer Capital Management, whose more famous brother, Victor, made and then lost a fortune trading, is up more than 50 percent. To predict how investors will behave, Roy Niederhoffer, who majored in neuroscience at Harvard, delves into psychological research.

But Mr. Niederhoffer does not need much research to tell him that some investors chase winners. With his fund soaring, investors are piling on. His assets under management have climbed to $2 billion, from $700 million earlier this year.

Still, Mr. Niederhoffer is not planning any celebrations.

“The greatest danger at a time like this is hubris,” he said. He has banned fist-pumping victory poses on his trading floor.


  1. #1 jeff
    November 9, 2008

    Roy N. is on a good track.

    I have a good idea of what Bernie is doing, and think his models are similar to a couple of mine, but obviously a lot better:)

    Since the cycles are changing, and correlations are off, I’m having trouble with any time frame longer than a session. My models do a great job of predicting what’s going to happen in the short term, but all the vol and gaps make longer term trading very difficult. Also, my spread trading, which is my yearly bread and butter, has been suspended with all of the volatility. Hell, with this market, even the shorts are getting killed.


  2. #2 MartinB
    November 10, 2008

    No matter what the model of this guy is – considering the amount of hedge fond managers, somebody is bound to make a gain just by pure luck.

  3. #3 Eric Lund
    November 10, 2008

    I agree with Martin: it’s possible that these guys are simply lucky, and their strategy hasn’t blown up yet. Consider the hypothetical CDP hedge fund examined by Andrew Lo in a 2001 paper and described in this post by Jim Hamilton of Econobrowser. CDP stands for “Capital Decimation Partners.” Lo’s strategy would have resulted in average annual returns of 41% from 1992 to 1999 and a return of -100% in 2000.

  4. #4 Dave Bacon
    November 10, 2008

    “No matter what the model of this guy is – considering the amount of hedge fond [sic] managers, somebody is bound to make a gain just by pure luck.”

    It’s also consistent with a small group of smart people who know how to eek a profit out of the system.

  5. #5 Jonathan Vos Post
    November 10, 2008


  6. #6 Marc
    November 11, 2008

    What would convince you that it’s luck and not skill (without being able to see all the multiverse :)?

  7. #7 Dave Bacon
    November 11, 2008

    I think it would be near impossible. One reason being that it is in the nature of the game that those who are winning should mask their ways.

    BTW I agree that it is “also” consistent with pure luck. But just because a curve is Bell does mean what is going on is just normal luck 😉

  8. #8 Comrade PhysioProf
    November 11, 2008

    I’m with the “lots of funds -> some managers are gonna look like geniuses by dumb luck” view.

  9. #9 Dave Bacon
    November 11, 2008

    It’s an easy hypothesis, Comrade. But not an easily provable hypothesis.

  10. #10 jeff watson
    November 11, 2008

    Luck has no place in having an edge in the market, and I speak from a little experience in these matters. All good traders have an edge overall, just like the casino has an edge in the table games. Despite having an edge, a trader can still face ruin, just like a casino.


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