Anything in nature wants to have the lowest energy possible. Any liquid has forces called surface tension that tries to have lowest surface energy by minimizing the surface area. Ferro-fluid or liquid magnet have tiny nanometer-sized (billionth of meter) magnets suspended in a liquid. These magnets are coated with substances that prevent them from accumulating and forming a huge magnet by keeping them apart. These tiny magnets have magnetic energy, which again want to be the lowest at any given time.

When a magnet is brought near, the tiny magnets in the liquid align in a manner that minimizes the magnetic energy by being far apart (more spikiness), but the liquid wants to minimize the surface energy by reducing the spikiness. It is this competition and intricate balance between the magnet and surface tension that makes the ferro-fluid look like a porcupine, but much more fun to play with!