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Tuesday, December 05, 2006

Rolling the dice

Bloomberg has a nice profile of former PayPal CEO and now hedge fund manager Peter Thiel. This guy is a born risk taker. Be prepared for a rough ride if you're an investor in Clarium. I like his intellectual pretensions and sense of style, though. He used to live in a suite at the Four Seasons and his fund has offices in the Presidio.

On a sunny September morning, Thiel and his 10 traders and analysts are at work in Clarium's offices in the Presidio, the former U.S. Army post, now a national park, on the edge of San Francisco Bay.

It's an odd place to find a hedge fund. Like most San Francisco money managers, Thiel used to work downtown, in the city's financial district. Then, last June, he moved Clarium to the Presidio, where Star Wars director George Lucas has built a gleaming new headquarters. A statue of Jedi master Yoda gazes over one of the courtyards.

Death Star

Thiel has built his hedge fund on the premise that people follow the herd. Swept up in the crowd, they lose sight of reality. Thiel moved from the Bank of America Center downtown to keep his team away from other money managers and investment bankers who might cloud their thinking.

Yoda would feel right at home here. Press a button, and the doors hum open -- BRRRMMMM! -- as if you were boarding the Death Star. The 22,000-square-foot (2,044-square-meter) digs include a library stocked with leather-bound works of Charles Darwin, William Makepeace Thackeray, Guy de Maupassant and Leo Strauss. Every few months, Thiel brings in eminent scholars from the worlds of math, psychology and economics to address his troops.

Ralph Ho, Thiel's chief operating officer, says Clarium is part hedge fund and part think tank.

``We are trying to repeat the George Soros of the late '90s and learn from his mistakes,'' says Ho, who was PayPal's treasurer.

$10 Billion

Clarium doesn't want to get too big and risk becoming unwieldy. If all goes well, Clarium might one day manage as much as $10 billion, Ho, 36, says. For now, the fund is closed to new investors.

A few Clarium traders are hunched over their screens on the trading floor, a pit surrounded by the glass-walled offices. Thiel's team members typically arrive at 5 or 6 a.m., hit the gym or go running in the late afternoon and then return at 5 p.m. or so to work a few more hours. They spend 85 percent of their time doing research rather than trading with clients' money. Each has a small account to test trades.

Thiel, who favors polo shirts, jeans and sneakers, tends to keep odd hours. He sometimes answers e-mails in the middle of the night, Clarium General Counsel Bruce Gibney says. Thiel starts his workweek on Sunday nights, following markets in Asia.

Rather than dart in and out of markets, like many hedge fund managers, Thiel has made three broad bets and plans to let them ride. All reflect his big-picture economic view.

Three Wagers

One is that the price of 30-year U.S. Treasury bonds will rise as the U.S. economy slows and deflation sets in. Another is that the dollar will strengthen against the euro as investors scale back investments in emerging markets funded by borrowing dollars. And the third is that energy stocks will keep climbing along with the price of crude as world oil production reaches its zenith.

Thiel uses leverage to juice returns, typically borrowing $3-$8 for every dollar under management.

``We only do one big trade a week,'' says Matthew Kratter, Thiel's head trader. Kratter, 36, has a Ph.D. in English literature from the University of California, Berkeley. Kratter started his finance career in 1999, day trading with his scholarship money.

Clarium investors need a stomach for risk, because Thiel has put all their eggs in a few baskets. In 2003, for example, Clarium made a fortune partly by betting -- correctly, it turned out -- that the dollar would weaken. Clarium turned heads by posting a 65.6 percent return that year.

Ups and Downs

``Investors often called to ask whether he was lucky or good,'' says Steven Drobny, a partner at Manhattan 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.''

Then, in 2004, Clarium posted a return of just 5.6 percent. It roared back in 2005 with a 57.1 percent gain, thanks in part to the payoff from a 2003 bet that the price of oil would soar.

Thiel is a proponent of a geologic theory known as peak oil, which holds that global oil production is now at or near its apex. Among his picks was Calgary-based EnCana Corp., which wrings oil from the tar sands of Canada. EnCana stock rose 54 percent in 2005.

Clarium has taken some hits along the way. Three times, Thiel has lost as much as 11 percent in a month. This past September, as the Dow Jones Industrial Average marched toward an all- time high, Thiel read a decline in U.S. new home sales as a sign that his forecast for the U.S. economy was coming true. He bet that the Russell 2000 Index would decline. Instead of slumping, the index kept rising. By the second week of October, Thiel exited the trade after hitting a stop-loss limit. Thiel was down 5.2 percent for the year through Nov. 3.

`Scary Guy'

``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.''

Thiel has even more riding on Clarium than most of his clients. He says he's invested his entire liquid net worth in his fund. Unlike most hedge fund managers, Thiel doesn't charge his customers an annual management fee. Instead, he pockets 25 percent of Clarium's trading gains. Hedge fund managers typically charge a 2 percent annual fee and take a 20 percent cut of profits.

...Thiel plans to keep hiring. To find candidates, he asks his employees to name the three smartest people they know and then contact those people to see if they'd like to work for him. Employees more than pay for themselves if they come up with moneymaking investments.

``They only need to have one good idea a year,'' Thiel says.

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.

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