Monday, September 28, 2009

Peter Thiel and Clarium Capital Suffering from their Pessimism

Clarium Capital is a well known "global macro" (i.e. buy/sell anything on the planet) hedge fund, run by Peter Thiel. They have a great long term record, and performed very well in 2008 (only a small loss) but 2009 has not been very kind. CBSMarketwatch reported the fund lost 8% just in the first 2 weeks of September alone, and appears to be down 15%+ for the year through mid September.
  • Clarium LP's tough 2009 got tougher in September. The hedge fund, run by PayPal co-founder Peter Thiel, lost 8% in the first 14 trading days of this month, according to an update Clarium sent to investors.
  • The hedge fund also cut leverage from 4.2 to 1 down to 1.4 to 1 between Sept. 11 and Sept. 19.
  • Clarium had already had a difficult 2009. Through Sept. 18 the fund is down 15.6% this year. Other big hedge funds that follow a similar global macro strategy, including Brevan Howard, Moore Global and Tudor BVI Global, are up more than 10% so far in 2009, through early September, according to data compiled by HSBC's private bank.
  • In February, Clarium was avoiding stocks, while betting on gains in the U.S. dollar, which the firm's Chief Economist Kevin Harrington called "implicitly a deflationary trade."
And investors seem to be fleeing (although part of this asset loss is a rough patch in the 2nd half of 2008):
  • Clarium's assets under management slumped to below $2 billion at the end of August from more than $7 billion in the middle of 2008, before the financial crisis deepened.
,,,despite great long term returns:
  • The fund is known to take big bets and generates volatile returns. It's up more than 270% since inception earlier this decade. (this is about 22% annualized since 2002, in a "lost decade" of stock returns)
Clarium's mistake? Seems to surround the old axiom - markets can remain irrational longer than you can remain solvent. The large drop in leverage the past few weeks, shows Clarium is learning this the hard way; it's also another case of another prominent investor crying uncle which a contrarian might take heart in.

This data also shows how much pressure there is in the industry - even a few bad quarters and many investors seem to flee. Which is why everything has now become so short term oriented in the capital markets.
  • In an August strategy letter to investors, Clarium Vice President Tyler McCellan sounded gloomy about the global economy and the outlook for investment. "Now that the party is over, everyone wants to invest wisely," he wrote. The problem is that "the world is suffering from both the failure of old ideas and a dearth of new ones."
As I like to say the market is not about reality in the near term, it is about the perception of reality. In time Thiel and group might certainly be proven correct (we share many of their thoughts!), as those who warned about the real estate debacle were in the middle of the decade, or those who warned of bubbles in NASDAQ stocks were in 99. Those warnings were also correct... in time, but first came epic bubbles that went much farther than anyone could imagine.

  • Hedge-fund manager Peter Thiel is suffering, not because he lost money in the downturn, but because he missed the rebound. Mr. Thiel, a billionaire co-founder of online payment company PayPal and an early investor in Facebook, thinks the economy is far from recovered and has bet with the bears amid the relentless rally. His fund has seen double-digit declines as other hedge funds have racked up gains.
  • Last year, the fund was sitting on gains of more than 40% before the collapse of energy prices caught Mr. Thiel by surprise (this hit many of us who were hiding out in commodities in the first half of 2008, before that trade reversed big time)
  • For much of this year, Mr. Thiel's firm placed a series of bets against the market, in part because valuations on a range of global equity markets have looked rich, he says. As markets have climbed higher, he has been forced to scramble to trim the positions, to avoid deeper losses.
  • He has bet on the Japanese yen, purchased safe bonds, wagered on the dollar, all in the belief fear will return to the markets. He has taken other conservative steps because "a real, sustainable recovery is not possible without productivity growth."
  • "The U.S. and much of the developed world are not very competitive globally -- that would require difficult improvements in technology that I'm not seeing enough of," he says.
Notice you will hear many of the same words we use on a weekly basis, but again... in the near term the markets are nothing more than (in my eyes) a mass psychology experiment - fundamentals mean little; it's game theory and mob behavior. It took me a long while to figure that out as I like to approach things from an analytical, common sense point of view. But I switched to this new framework the last 5-6 years; hence watching "nonsense" play out is a lot more understandable. Even bemusing at times.

These 3 blurbs in the first bullet point below could literally be taken from any number of virtual pages of the website.
  • "The recovery is not real," he says. "Deep structural problems haven't been solved and it's unclear how we will create jobs and get the economy growing again -- that's long been my thesis and it still is."
  • "The government has helped stabilize the banking system, but I'm not sure we have a path toward sustainable growth," partly because consumers are dealing with debt and other issues, even as an energy crisis looms, he says. "It always feels unpatriotic to be negative. But too few people are focused on the real problems."
It's not just Clarium
  • The contrarian view puts Mr. Thiel among a group of investors with impressive track records who are holding out, unwilling to buy into the notion of the economy's rebound.
  • In London, the largest fund of John Horseman's $4 billion hedge-fund firm is down 20% this year; "it is hard to build longer-term confidence when employment prospects and job markets are shrinking," he said in a client letter.
  • "The problem is that governments do not create income or wealth, and current stimulus equates to a future tax liability. That will become a major concern in mid-2010 when the stimulus is done."
Marketfolly: Clarium Capital's August 2009 Letter - Save Now, Invest Later

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