12/02/2009

Despite Losses, Clarium Founder Still Bullish

Although his firm has seen only a trickle of revenue during the past two years, Clarium Capital founder Peter Thiel is seeking to reassure investors that he remains committed to his $2 billion hedge fund and its global-macro strategy.

Some investors in Clarium's hedge fund have grown increasingly nervous about the San Francisco firm's financial stability after nearly two years of losses. Unlike most hedge funds, Clarium charges no management fee - just 25% of gains - so the firm hasn't had any hedge fund revenue since the end of 2007.

Thiel, best known as a venture capitalist who co-founded PayPal, told investors during a conference call last month that he has the wherewithal to keep the firm afloat. For one thing, Clarium manages several separate accounts that have continued to pay management fees. And the hedge fund's hefty performance fee generated enough revenue in the good years to sustain the firm for the foreseeable future. Thiel said he plans to continue running his personal capital through Clarium's hedge fund for another 10-15 years.

Thanks to Thiel's deep pockets, Clarium can remain in business at a time when countless fund operators are struggling to survive. After the hedge fund industry suffered its worst-ever losses last year, many funds remain well below their high-water marks. For fund operators, that means getting by on management fees for as long as their funds are under water. Indeed, many management firms are expected to go bust before their funds get back to their high-water marks.

Clarium, which Thiel founded in 2002, posted stellar returns in its early years, but then lost nearly 5% last year and 18% so far this year. Assets under management have plummeted from around $6 billion in August 2008 due to a combination of investment losses and shareholder withdrawals.

Clarium started out 2008 with big gains thanks to successful plays in the commodity-futures market. By August, the fund was up 45%. But it posted steep losses during the final three months of the year due to badly timed bets on equities. In October alone, the fund fell 18% - its biggest-ever monthly loss.

This year, as stock markets have rallied, Clarium has maintained a bearish stance on the economy. Its short bets, including one on the Russell 2000 stock index, have proved particularly damaging. "It's the shorts that are killing them," said a portfolio manager who is familiar with Clarium. "While their macro-economic views may be sound, they've too much risk on their books. The level of leverage and the direction of their bets are too aggressive. You need a huge stomach to stay with this fund."

Global-macro funds in general have had a difficult time this year. Most managers have a negative view of the world economy, but government interventions around the globe have turned many global-macro bets sour.

Thiel initially ran Clarium as a family office, but started accepting money from outside investors in 2003. Outsiders estimate that he personally owns about 20% of the fund's assets.

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