Learning from Peter Thiel

January 12, 2011
ain't doing so well. Its assets under management are down 90% from their peak, and total returns from the high point are -65%.

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Peter Thiel’s hedge fund, Clarium Capital, ain’t doing so well. Its assets under management are down 90% from their peak, and total returns from the high point are -65%.

Thiel is smart, successful, rich, well-connected, and on top of all that his calls have actually been right:

In investor letters and interviews, some predating the global financial crisis, Thiel identified three broad economic bets he planned to let ride: 30-year U.S. Treasury bonds would rise as the U.S. economy slows and deflation sets in; the dollar would strengthen against the euro as investors scale back investments in emerging markets funded by borrowing dollars; and energy stocks would climb along with oil prices as production peaks.

None of that, clearly, was enough for Clarium to make money on its trades: the fund was undone by volatility and weakness in risk management.

There are a few lessons to learn here.

Firstly, just because someone is a Silicon Valley gazillionaire, or any kind of successful entrepreneur for that matter, doesn’t mean they should be trusted with other people’s money.

Secondly, being smart is a great way of getting in to a lot of trouble as an investor. In order to make money in the markets, you need a weird combination of arrogance and insecurity. Arrogance on its own is fatal, but it’s also endemic to people in Silicon Valley who are convinced that they’re rich because they’re smart, and that since they’re still smart, they can and will therefore get richer still.

Thirdly, getting big macro calls right is all well and good, but it’s as likely to lose you money as it is to make you money.

Fourthly, hedge funds need to hedge—or at the very least to put hard stop-losses in place when they enter into a trade.

And finally, if you invest for “the intellectual challenge” rather than to make lots of money, you’ll get what you wished for.

There’s a lesson here for hedge funds looking to pick up brainiacs like Larry Summers—another smart, arrogant, and well-connected person with big financial ambitions—when they exit the government’s revolving door. Summers made a hefty multi-million-dollar salary when he was at DE Shaw, but it’s worth remembering that when he was actually in charge of running money himself, he put Harvard into a series of disastrous interest-rate swaps which ended up losing the university $1 billion. If you want positive investment returns, rather than proximity to people with geek-celebrity status, the likes of Thiel and Summers are probably best avoided.


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