R.G. Niederhoffer’s (RGN) lead fund, the Diversified Program, which has AUM of $472M, posted a return of 9.3% during 2013. The much smaller Optimal Alpha Program, AUM of $11M, gained 24.7% during the same period, according to a letter to investors reviewed by ValueWalk.

R.G. Niederhoffer’s January performance

Though 2013 returns may appear low in the context of the overall gain seen in equities that year, the Diversified Program really came into its own in January, a month marked by global turmoil and weakness in equities.

“Our flagship Diversified Program gained +7.5% in January, maintaining its strong protective quality during the recent decline in equities,” says the fund’s monthly report. “Given our strategy’s primarily contrarian nature and protective mandate, we were able to succeed in a month in which trend reversals affected many other market participants.”

Historically, R.G. Niederhoffer Diversified outperforms in down times

This is an interesting study of how different hedge fund strategies stand up during market crashes. The table ranks the 25 worst such instances for the S&P 500 (INDEXSP:.INX) in descending order and presents the performance for various strategies.

1-rgn-drawdowns R.G. Niederhoffer

Note how, against the S&P 500 (INDEXSP:.INX)’s total return of negative 276% during these periods, R.G. Niederhoffer Diversified returned +105%. During the latest drawdown in January, the Diversified Portfolio earned +8.6% while the S&P 500 lost 5.8%.

“A key feature of our program is its tendency to perform extremely well during these difficult periods for portfolios, in which the S&P 500 (INDEXSP:.INX) declined a total of -276%, hedge funds lost -77% and CTAs lost -24% (despite the common misconception that CTAs are a “put on the stock market”),” states the fund report.

Does the armor work consistently…and across all down weeks?

2-rgn-down-weeks R.G. Niederhoffer

It does, as can be seen from the above chart. Note how the blue line (R.G. Niederhoffer Diversified) is almost always in positive return territory during these weeks when the S&P 500 declined. In contrast, the green line, representing trend-following portfolio managers, is usually losing.

Another contrarian aspect – realized volatility

The R.G. Niederhoffer Diversified outperforms during periods of high realized volatility, in direct contrast to other players such as hedge funds and CTAs.

[Layman’s definition:  Realized volatility is the magnitude of daily price movements, regardless of direction, of some underlying, over a specific period. (It is sometimes also referred as historical volatility)]


Note how the R.G. Niederhoffer funds (blue bars) show that RGN fund returns were positively correlated to the changes in historical volatility in the S&P 500 (INDEXSP:.INX) since January 2000. In contrast the other strategies underperform on average when volatility is rising, but do better when volatility decreases.

Contrarian and protective

Given the elevated levels at which equities are currently ruling, the R.G. Niederhoffer funds could be useful for investors looking for a defensive investment that could yield good returns when markets are correcting.