R. G. Niederhoffer Capital’s flagship Diversified Program with $527 million under management is up 27.7 percent for the year through May. The Niederhoffer Capital fund was up 5.6 percent in April but detracted 0.7 percent in May, breaking the streak of positive returns the was maintained in the last six months.
Other smaller allocations of R. G. Niederhoffer Capital, also called programs, have shown mixed performance. The most notable of them is Optimal Alpha Program with just $8 million under management, has returned 41 percent YTD. Interestingly the Optimal Alpha strategy boasts “Low correlation to equities/FOFs”, so managing an outsized return like this especially stands out if the program is indeed independent of the booming equity markets.
Same goes for the Negative Correlation Program, up 10 percent YTD, which is performing well despite of the strong market rally.
Niederhoffer Capital Short Gold Pays Off In April
Niederhoffer Capital has been poised for the much anticipated correction in US markets towards the mid of 2013 and the fund has wanted the markets to stop riding on the coattails of QE for some time now. Niederhoffer was short gold in April, a fortunate positioning that returned handsomely as gold dipped suddenly (Tiberius CTA Makes a Timely Short Bet on Physical Gold). The Diversified Program was able to profit from the sell off in precious metals and was up in all of its assets in April, fixed income, forex and commodities, while losing slightly in equities. The fund also profited from trading USD/JPY. Niederhoffer thrives on volatility so these are good times for the fund.
Niederhoffer Capital: Bad Times For Fixed Income Assets
Niederhoffer also comments on the opposite reaction of Japanese markets to increasing interest rates, which has been exemplified by the massive sell-offs in Nikkei over the past couple of weeks. JGBs have shown their ability to react irrespective of the government’s stimulus. Japan, which has the second largest fixed income base in the world, makes the case for US as well where interest rates have risen from 1.62 percent to 2 percent.
Niederhoffer discusses the implication of upward interest rates in the next two decades in the US, as opposed to the consistent decline in rates witnessed in the last twenty years. The buy and hold strategy that worked well with declining rates cannot be reciprocated into an equally profitable sell and hold strategy. Sell-hold approach will detract -1 percent annually, as per Niederhoffer’s research, in stark contrast with buy-hold that had returned +4.7 percent per year.
Of course the analysis makes several assumptions. Hedge funds and CTAs could use carry trades or short strategies to compound higher returns, but the bottom line of Niederhoffer’s analysis is that it would also be very hard to play out short bias on fixed income assets in times of rising interest rates.
So are even worse times for bond traders ahead?