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).
It’s too short a window to measure the performance of a hedge fund, least of all a macro player like Clarium. See where they are in a year!
A hedge fund is supposed to be able to make money in any type of market. Year is not over yet so don’t count Thiel out yet.
redemptions require 1 quarters notice. there will be another wave of selling before year’s end ….
maybe they’ve sold and need to buy to cover? who knows what they’ll do.
Hello! is there anybody in there?
There is NO investment that makes money in any type of market. None, zero, zilch.
RISK is associated with ANY type of return. Even money market funds showed earlier this year that there’s no such thing as risk-free investing.
There’s even risk in holding onto dollar bills (your mattress might catch fire).
You leave out (or don’t know) a very important piece. As far as I know, his fund might be outperforming every other hedge fund out there.
So, how does Clarium compares to other hedge funds?
From the Bloomberg story linked to above:
“Thiel, who manages $5.2 billion, trades everything from stocks to commodities, seeking to profit from broad economic trends, a strategy known as macro investing. Such funds lost 1.27 percent last month and have risen in value by 1.3 percent this year, according to HFR in Chicago. ”
So he is underperforming hedge funds with the same style of investing.
It’s hard to make money when everyone is selling.
You can only sell if there’s a willing party to buy….
Clarium is a global macro fund. This means it takes a makes a judgement on a macro level (or looking at the bigger picture) and will then take out highly leveraged long or short positions (via derivatives) to try to make money from these views. It is a very risky strategy and offers potentially high returns. Investors in such a fund are well aware that large drops like this are not uncommon – and are not necessarily correlated to the immediate market environment – so this is really not a big deal. Next month he may equally make 20% back – and then no one will be talking about them having a bad year any more.
http://en.wikip...ki/Global_macro
The type of hedge fund you are talking about is a more conventional long/short hedge fund or ‘market neutral’. These seek to hedge out all ‘market risk’ by buying stocks which they think are good and shorting the market as a whole to avoid market risk – thus benefitting from the ‘alpha’ of the stocks.
http://en.wikip.../Market_neutral
http://en.wikip...org/wiki/Alpha_(investment)
how does an 18 percent hit wipe out a 58% year-to-date gain?
The 58% return was through the first half of the year. So he must have had losses before October as well.
ah yes – reading it again, it does make sense, thanks!
yea the language is a bit confusing i missed it too
I think, they will manage very well.
http://www.oxyshopping.com
i dont think pete or any of his investors will be receiving eviction notices anytime soon. imagine multi-millionaires experiencing hard times.
im curious how much the average investor has invested in clarium.
VentureLocator.com
Eric, I think you’ve looked at this from a very short term perspective. I don’t think anyone is even trying to make money in this climate and it’s unreasonable to expect so.
The idea is you minimize losses and the hedge fund has minimized losses relative to the rest of the investment options.
I think saying “When an investor like Thiel can’t make any money in this market, what chance do the rest of us have? ” is just pushing it and everyone already understands the fact. No need to glorify the doom/gloom message
If you are not trying to make money in this market or any market, then you are better off putting your money in a mattress.
No you wouldn’t. Inflation is growing faster than savings account interest payment and definitely mattress money. That means you lose purchasing power over time – your dollar under the mattress will buy you less tomorrow than today. In this environment, you HAVE to find a place to invest your money to at least keep up with inflation. It’s a tough world out there.
It is benchmark that counts, Clarium is still one of the best hedge fund in the crisis.
Strange. I just read a article on the WSJ yesterday about how the long/short yield spread has been widening, and how that signals a long recession. In a recovery the short term rates will begin to rise, and the spread will lessen, at least according to the WSJ article.
They even had a chart that showed the spread increasing dramatically over the last few months.
Maybe so. But his particular bet was on the spread between 30-year T-bills and 10-year T-bills. That spread is narrowing:
http://finance....site_bond_rates
Good link.
Your right it did narrow from .53 a month ago to .36 a week ago. But, it’s back up to .48 yesterday, so if he held on maybe he made some of that money back.
My question is: how do you go about getting the kind of leverage you need to cause your entire portfolio to go down by 18% based on these moves?
I know a guy who manages to beat the market every year. He’s UN-leveraged.
“When an investor like Thiel can’t make any money in this market, what chance do the rest of us have?”
Is there any successful investor who has never lost money?
yes, people who invest in cash.
I’ve been trying to schedule a meeting to pitch UMapper to The Founders Fund but things have been extremely slow… Now I know why.
Thiel is a braniac, i love listening to the guy talk. Even when Mike interviewed him at TC50, it looked as if Mike was set back by what was rolling off the guys tongue. He most likely understands derivative, spreads, etc better than most. What i will say is that any investor has to hedge and when hedging, you must look for economic bubbles and short them. The two most obvious were oil and mortgages. Today’s biggest opportunity is Natural Gas because it is our future source of energy. I wasn’t aware of the opportunity until i did this marketing project for a client. http://www.star...ging.com/Hybon/
Erick, parts of your posts and some of your comments in response really highlight your lack of investing knowledge. Stick to start-ups.
Good post.
http://vidsonly.blogspot.com
douchie comment.
http://quit.spa...ming.techcrunch
I am no investment expert, but I was under the impression that hedge funds are NOT supposed to hedge against risk like you described, Eric. If anything, they tend to be more risky than the S&P, so swinging less on the downside is pretty good. Investment experts feel free to correct me =).
How do hedge funds work under Socialism?
When an investor like Thiel can’t make any money in this market, what chance do the rest of us have?
Hummm….I no professional, but I did stay at a Holiday Inn… How could we mere mortals actually make money in this economy?
1. Diversify. 81% is not diversification.
Clarium had 81 percent of its money in positions used by investors… such as for 10-year Treasury notes and 30-year bonds.
2. Invest in products with low sales and marketing costs.
3. Plan to invest for the long-term.
4. AND Do NOT LEVERAGE YOURSELF 4X!
If you went out and took all your credit cards and bought stock you’d be an idiot and a criminal. If you are a Hedge Fund manager – you just have a bad year… (BTW, The Gov’t outlawed investors borrowing to invest after the Depression.) But unregulated Hedge Funds have no such rules.
Hedge funds are not supposed to hedge against risk. It’s an understandable misreading of their titles. Hedge funds are investment pools only which may or may not hedge against risks. In fact, some hedge funds amplify risks. Without risk there is no reward. Without reward there is no hedge funds.