Crisis star RG Niederhoffer struggles in calm markets Hedge fund’s 22% drop this year comes after fresh burst of central bank support

Atop-performing hedge fund during the financial crisis is heading for one of its biggest annual losses, as a return of easymoney policies from central banks helps suppress the market volatility it has been betting on.

New York-based RG Niederhoffer Capital Management, headed by computer scientist and opera aficionado Roy Niederhoffer, has suffered a 22 per cent loss in its flagship Diversified fund this year to the end of October, according to numbers sent to investors.

The fund, which was set up in 1993 and is one of the world’s oldest computer-driven hedge funds, uses algorithms to make bets lasting from a few minutes to several weeks to try to profit from swings in equity, bond and other markets. It tends to do well when market volatility spikes, and can also profit by betting that rallies during a bear market will fade.

But the fund has found life tough in an environment dominated by central bank stimulus, which has pushed up asset prices while keeping a lid on volatility. It is a problem faced by many other hedge funds, whose complex trades based on analysis of economic fundamentals have often delivered lacklustre returns compared with the low-cost option of betting on ever- rising markets.

“It’s certainly been a long period of frustration,” Mr Niederhoffer told the Financial Times. “One of the greatest equity rallies in history” has been a “less-than-ideal” backdrop for his fund, he added.

Mr Niederhoffer, an accomplished pianist who owns five pianos, including one in his office, was one of the star performers during the financial crisis. His fund made 30 per cent in 2007 and 51 per cent in 2008, when many asset managers were experiencing large losses.

But the fund was down by double digits in 2016 and 2017, as trillions of dollars of quantitative easing helped to keep markets sedated. Assets at his firm have shrunk from about $1bn a decade ago to roughly $400m, even as the fund cut fees charged to investors in 2016.

The Federal Reserve’s pivot towards monetary easing at the beginning of this year, combined with dovish moves from the European Central Bank and the Bank of Japan, have also capped big swings in prices. That wrongfooted Mr Niederhoffer’s fund, which had seen gains from a turbulent fourth quarter and was positioned for more of the same.

“It’s been so quiet in equities, we haven’t had the opportunities,” Mr Niederhoffer said. Almost every time his fund tried to bet on falling prices, it was “met by a wave of liquidity coming into the market.”

The losses have put him on track for one of his toughest years on record, close to the 22.4 per cent the fund lost in 2012, although still some way off the 32.5 per cent it lost in 1999.

“It’s a bit too spicy,” said one hedge fund investor who has opted not to commit cash to Mr Niederhoffer’s fund. “You never know when you’re going to make money.”

Mr Niederhoffer, a New York resident who led a rescue of its City Opera from bankruptcy four years ago, sees the next steps of central banks as the key question confronting the global financial system.

“Can central banks keep the liquidity [flowing]?” said Mr Niederhoffer. “If they do, then everything is going to go up. If they fail, then it’s going to be the [global financial crisis] all over again, and maybe worse.”