The latest edition of Bloomberg’s Markets magazine has an interesting feature on the Clarium macro fund, run by Peter Thiel. Here are some interesting quotes from the piece:
– One morning in 1998, at Hobee’s coffee shop, near Stanford University, a young money manager named Peter Thiel decided to gamble on an Internet startup. Thiel ended up investing $240,000 in the company, which eventually became PayPal Inc., the giant of online payments. Thiel ran Pay-Pal, took it public and, in 2002, sold it to EBay Inc. for $1.5 billion. Thiel, then 34, walked off with $60 million.
– Clarium turned heads by posting a 65.6 percent return that year. “Investors often called to ask whether he was lucky or good,” says Steven Drobny, a partner at Manhatten Beach, California–based Drobny Global Advisors, which advises global macro funds on world markets. “Whenever you have someone who puts up sensational returns out of the gate, people wonder if he’s rolling the dice or if there is real thought behind it.”
I find the topic of how randomness and chances permeates our lives fascinating. In many cases, we believe we are in control of our situation or environment when we are not. In trading, for example, it is impossible to know for certain what portion of trader’s fortune can be attributed to sheer luck and how much is due to the skill of the individual, regardless of whether there is ‘real thought’ behind the investment decision process. Indeed, while successful traders often share common traits, perhaps these are more of a pre-requisite requirement to stand any chance at success; i.e, a trader’s emotional and intellectual intelligence may take them into a certain threshold or category, reducing the probability of being wiped out due to naive errors, but perhaps the odds of success still remain close to random. What am I doing, talking like a proponent of the efficient market hypothesis? No, I must stop with this heresy (at least for now).
– Clarium has taken some hits along the way. Three times, Thiel has lost as much as 11 percent in a month. “Thiel can be a scary guy if he’s the only one in your portfolio,”
says David Philipp, a Clarium investor and managing partner at San Francisco–based Gyre Capital Management LLC.“He’s not afraid to put his money where his convictions
are, and he’s not the guy who’s happy with 5 percent returns and 3 percent volatility.”
While arbitrage type strategies can often produce abnormal returns with low risk, the majority of funds have to accept risk as part and parcel of trading life. Losses and drawdowns are part of the game. Traders just have to make sure you are generating sufficient returns for each unit of risk. A monthly drawdown of 11 per cent is nevertheless uncomfortable, but investors can always diversify their risk by including these high risk investments as part of a wider portfolio.
– Thiel’s alter ego at Clarium is a physicist named Kevin Harrington, who used to do mathematical research for the U.S. Department of Defense. The two sometimes talk strategy for five hours at a stretch. “Peter is my foil, and I’m his foil,” Harrington, 37, says.
Even if the final investment decision is made by a single individual, finding someone to bounce ideas against can be invaluable. They can play a role in interrogating a trader’s views for robustness, and help with the hatching of new ideas. For such a partnership to be productive however, the individual must have complimentary characteristics to the decision maker and this can be rare.