Learning from Peter Thiel

By Felix Salmon
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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Excellent points.

However, the ignorant investor will prefer to turn to those with a past history of making money. They just chase the hot fund, your sagacious arguments notwithstanding.

Posted by MarkWolfinger | Report as abusive

I think your 3rd to 5th points hit the mark, especially with regards to Peter Thiel. However, I’d phrase them slightly differently. Being able to make money is about having/coming to the right opinions (most of the time) but also as much (if not more so) about how you execute those opinions.

Investors, the media, etc spend a lot of time discussing people’s opinions, judging people by their opinions, etc.

In reality, it’s the execution (and by this I mean the portfolio & risk management within execution) that really matters. The problem with many hedge funds (Peter Thiel probably falls into this category) is that most of their time is focused on coming up with opinions (whether it be stock research or macro themes, etc) and thus their portfolios are essentially the equivalent of a futures product, whose return is based on their opinions. What separates out those who are good portfolio managers, is their ability to look at the portfolio as a whole (rather than as a collection of individual opinions/stocks/themes/ideas) and in doing so/as a result of this spend their time thinking about how to create a portfolio who’s return will look like something akin to a call option on their opinions.

However, this isn’t something that investors (in funds) and/or the media focus on because it’s technical and dull (especially in comparison to hearing someone’s opinions).

Posted by OurManinNYC | Report as abusive

Why do you say Thiel is smart? I don’t see that. Lucky, maybe, and often lucky is better than smart, but I don’t see smart.

And all of his calls have NOT been right. If they were, he wouldn’t be down 90% from the peak. The right calls on those investments would have been to sell a while ago. If he was investing in treasury bonds, or dollars or energy stocks, he would have been right, but he obviously wasn’t smart enough to translate those predictions into good investments. But maybe he’ll make it up on Facebook.

Posted by OnTheTimes | Report as abusive

I’d have to agree that being rich DOES NOT equate to intelligence – becoming rich is either a) a combination of extremely hard work feeding off a good idea/concept; b) a direct result of your network of ‘friends’ giving you countless plush opportunities; or c)taking advantage of someone. None of these really makes someone smart in my opinion, and frankly when it comes to investing most people are dumb as a board. My God, the rapper 50 Cent tweeted about a pink sheets stock and a flock of sheep bought in sending the share price soaring… and he beneficially owned 30m shares!

Posted by CDN_finance | Report as abusive

Even a better example than Summers would’ve been Long Term Capital Management. It was founded by John Meriwether and had Myron Scholes and Robert C. Merton, both Nobel prize winners, on the board.

LTCM lost $4.6B (USD) and needed to be bailed out. Meriwether went on to start another fund, which also lost a huge amount of money and closed down.


Posted by Chris_Gaun | Report as abusive

You refer to “people in Silicon Valley who are convinced that they’re rich because they’re smart”. There is a parallel group in Silicon Valley who look around and see plenty of people who are rich, but not as smart as they are.

So they’re convinced that it must be child’s play to get rich. Many come a cropper.

Posted by lknobel | Report as abusive

If you, Felix, had anything resembling a sense of humor you would have already sent him a copy of John Bogle’s “The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns”.

Posted by ARJTurgot2 | Report as abusive

LTCM, precisely, Chris. No better example than that. Scholes and Merton only cared about their theories. They and their merry band spoke about what intellectual statement the market was stating on a given day not how much money they would rake in if they did X or Y or Z.

And don’t forget The Smartest Guys in the Room who now luxusriate in varius prison cells. Can you spell Skilling?

It’s good old hubris and the Greeks thought it a grave offence to the Gods. There were no jail cells then. They chained you to a rock and had vultures sup on you.

Connecting Hedge Fund Investors

Posted by Miliev | Report as abusive

OnTheTimes, reading comprehension is not your strong suit: the headline “fund shrinks 90%” is quite the attention grabber, but very mis-leading. losses, but MOSTLY REDEMPTIONS, have caused his assets to shrink.

he’s up 12% per year since 2002 — and I will bet he’s up big in 2011. he mis-played how far the gov’t will run a ponzi, that’s all. and his macro thoughts are right on, just interrupted by the ‘great intervention’. brilliant guy.

Posted by jswede | Report as abusive

Funny thing about mutual funds (and hedge funds) — they often show a strong long-term return while actually LOSING money. I don’t know if that’s the case with Thiel’s fund, but it seems to fit the common profile.

(1) Have a good run while managing a small amount of money.
(2) Take on massive amounts of new investment chasing the “hot” manager.
(3) Place some bad bets and lose most of it.
(4) Have all that “hot” money abandon the fund.

Wonder what his asset-weighted returns would look like?

Posted by TFF | Report as abusive

@jswede, ok, but his total returns from the high point are still down 65%. It wasn’t just, or even mostly, redemptions that caused the fund to shrink.

Felix’s post doesn’t mention anything about 12% per year, so I don’t know if you are cherry picking – when did the fund start? If he is so smart, how come he didn’t see the 65% decline from the peak coming?

Posted by OnTheTimes | Report as abusive