Niederhoffer Capital’s Flagship Fund Down 1% YTD: Inflation is Concern


R. G. Niederhoffer Capital Management, Inc. is a multi strategy CTA, based in New York City. The fund currently has assets under management close to $600 million. The firm has five CTAs (similiar to hedge funds).

The flagship fund, is Diversified Program fund, which targets both attractive stand-alone performance and downside equity protection.

The fund was down 0.2% in January and 1.2% in February. The fund had a phenomenal 50% return in 2008, when the S&P 500 was down 37%. Since 2000, Diversified Program has returned 9% per annum.

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Other funds have performed far better this year. The iHedge Inflation Protection Program, has a YTD return of 3.1%. iHedge  combines the flagship’s short-term trading strategy and also has a short credit/ long commodity component. When yields and commodities rise, the fund usually performs well.

The fund manager noted the fear of inflation, and the recent rise in both treasury yields, and core CPI.

The fund manager noted, that there has already been a significant increase in inflation readings, which have drifted back to within the target range of 2-3% after falling precipitously from mid-2008 through the end of 2010. The chart above right shows core inflation since 2008.

After bottoming out at 0.6% in October 2010, core inflation has been steadily climbing. Recent moves in treasuries suggest that the market expects this to continue. Even if the rise in yields turns out to be an overshoot in the near-term, it may be a good time to consider alternatives as an inflation hedge.

Niederhoffer Capital's Flagship Fund Down 1% YTD: Inflation is Concern

Additionally, the Federal Reserve is creating an inflation risk. The enormous increase in the money supply, which we discussed in our last letter. So far, most of this money is being invested in “risk-free” government bonds rather than being lent to risky borrowers. However, if the Fed is eventually successful in its efforts to encourage lending, inflation is likely to accelerate upwards as the amount of money flowing through the economy surges.