Peter Thiel's Hedge Fund Troubles

Nearly every investor is hurting right now — even PayPal co-founder Peter Thiel, who manages the $5.2 billion Clarium Capital Management hedge fund. The fund has had a good record over the years, with a 27 percent annual return since it started in 2000. And up until June, Thiel managed to produce a 58 percent return for the year. But in the second half of the year, his bets turned sour, and in October alone his fund took an 18 percent hit, wiping out all the gains for the year. The fund is now at a 3 percent loss overall.

That’s still better than the S&P 500. But a hedge fund is supposed to hedge against risks. Thiel, like many other hedge funds, leveraged his investments 4.4 to 1 with borrowed money, which compounded his losses. What did him in was a bet on the difference in interest rates between different types of bonds. As Bloomberg explains:

Clarium had 81 percent of its money in positions used by investors when they expect a widening spread, or gap, between bond yields, such as for 10-year Treasury notes and 30-year bonds. Instead, yield spreads narrowed in October.

When an investor like Thiel can’t make any money in this market, what chance do the rest of us have?

(You can watch Thiel being interviewed onstage by Michael Arrington at TechCrunch 50 earlier this year).

Original post

Comments

[MJT:]

That is not what did him in at all; that Bloomberg reporter should be fired for doing such sloppy work. Clarium's losses in October were from equities, not bonds. The bond position was established later in the month, after the losses on equities had already been taken, and the bonds were not responsible for the losses. The 4.4x leverage is also erroneous - the leverage varies tremendously depending on what kinds of positions the fund has on at any given time; at a particular point in time it could be 4.4x if there are more lower-risk relative value bond positions, but when there are more volatile directional positions in commodities and stocks then the leverage is much lower than that.

2008 Nov 06 09:01 PM

[notsosmart:]

all the hedge funds should collapse.the wealthy chasing more wealth.who needs them.can we go on without them?

2008 Nov 07 10:35 AM

[AJB7:]

I'm not sure what you mean when you say "what chance do the rest of us have". I run my portfolio pretty much on classical bread and butter hedge fund principles and while I haven't really made any money this year, I haven't lost anything either. First, you run your quanitative risk/reward screen on the universe of securities and sectors every day. The more bullish selections you find the more you become 100% invested with a higher long/short ratio. When you don't find as many bullish selections you move more into cash and lower the long/short ratio moving towards market neutral for the remainder. By the begining of Sept I was 75% in cash with the invested portion net market neutral. Since then I've been mostly out of the market entirely except for some long dollar and treasury positions and a few select stocks. I probably will miss the great turn at the bottom, since I don't try to predict market action, but whenever that happens I will be getting long for the next cycle soon enough. Although I do have a Ph.D (and I think Taleb mentions one of my books in his bibliography) this really isn't rocket science.

2008 Nov 09 11:24 PM

[Patient player:]

I think the author of post has proven a point that individual shrewd investors have done well through their time tested techniques although he has a Phd. This is a simple and relevant learning.


On Nov 09 11:24 PM AJB7 wrote:

> I'm not sure what you mean when you say "what chance do the rest
> of us have". I run my portfolio pretty much on classical bread and
> butter hedge fund principles and while I haven't really made any
> money this year, I haven't lost anything either. First, you run your
> quanitative risk/reward screen on the universe of securities and
> sectors every day. The more bullish selections you find the more
> you become 100% invested with a higher long/short ratio. When you
> don't find as many bullish selections you move more into cash and
> lower the long/short ratio moving towards market neutral for the
> remainder. By the begining of Sept I was 75% in cash with the invested
> portion net market neutral. Since then I've been mostly out of the
> market entirely except for some long dollar and treasury positions
> and a few select stocks. I probably will miss the great turn at the
> bottom, since I don't try to predict market action, but whenever
> that happens I will be getting long for the next cycle soon enough.
> Although I do have a Ph.D (and I think Taleb mentions one of my books
> in his bibliography) this really isn't rocket science.

Jan 23 05:22 AM