Pessimism Exacts a Price on the Skeptics

By GREGORY ZUCKERMAN Hedge-fund manager Peter Thiel is suffering, not because he lost money in the downturn, but because he missed the rebound. BAD VIBES: Taking the contrarian view as the market has rallied has left some hedge-fund managers, such as Peter Thiel, missing out on big gains. Mr. Thiel, a billionaire co-founder of online payment company PayPal and an early investor in Facebook, thinks the economy is far from recovered and has bet with the bears amid the relentless rally. His fund has seen double-digit declines as other hedge funds have racked up gains. "The recovery is not real," he says. "Deep structural problems haven't been solved and it's unclear how we will create jobs and get the economy growing again -- that's long been my thesis and it still is." The contrarian view puts Mr. Thiel among a group of investors with impressive track records who are holding out, unwilling to buy into the notion of the economy's rebound. In London, the largest fund of John Horseman's $4 billion hedge-fund firm is down 20% this year; "it is hard to build longer-term confidence when employment prospects and job markets are shrinking," he said in a client letter. In New York, a large hedge fund run by investing power Renaissance Technologies dropped almost 12% through August by wagering on stocks with promising earnings prospects and betting against those seen as flimsier. And in Chicago, Benjamin Bornstein's smaller Prospero Capital Management lost almost 5% through the second quarter, but he is still shorting the market. Heavy job losses, weak revenue growth for most companies, full stock-price valuations and an inability of the economy to grow without help from the government are all reasons Mr. Bornstein remains wary of stocks. "I have rarely been so convinced that the next broader market move is down," says Mr. Bornstein, who avoided most of the market's troubles last year. "The problem is that governments do not create income or wealth, and current stimulus equates to a future tax liability. That will become a major concern in mid-2010 when the stimulus is done." Mr. Thiel's Clarium Capital Management, which at one point last year had $6 billion in assets, has seen losses of nearly 16% through mid-September, compared with a 14% rise for hedge funds broadly through August, according to Hedge Fund Research Inc. Clarium now manages about $2 billion. In 2008, Clarium lost 4%, even as the Standard & Poor's 500-stock index fell 38%, and the firm has recorded annual gains averaging 22% since inception in 2002, according to investors. Last year, the fund was sitting on gains of more than 40% before the collapse of energy prices caught Mr. Thiel by surprise, making Mr. Thiel's contrarian stance in the face of losses seem more gutsy. For the skeptics, the stakes are high. The hedge-fund business had its worst year on record last year; another year of disappointing performance could be the death knell for many funds that struggled last year. Mr. Thiel wouldn't seem like an obvious poster boy for the market's worrywarts. A 41-year-old former nationally ranked scholastic chess player and graduate of Stanford Law School, he was chief executive officer of online-pay service PayPal earlier this decade and scored big in 2002 when eBay Inc. bought the company for $1.5 billion. Mr. Thiel added to his venture-capital successes with early investments in firms like Facebook and Palantir Technologies, a high-tech firm that hunts for terrorists. In 2002 he launched Clarium and scored impressive gains for several years, largely by buying up energy investments on the view that growing global demand and more limited supplies would boost oil prices. For much of this year, Mr. Thiel's firm placed a series of bets against the market, in part because valuations on a range of global equity markets have looked rich, he says. As markets have climbed higher, he has been forced to scramble to trim the positions, to avoid deeper losses. He has bet on the Japanese yen, purchased safe bonds, wagered on the dollar, all in the belief fear will return to the markets. He has taken other conservative steps because "a real, sustainable recovery is not possible without productivity growth." "The U.S. and much of the developed world are not very competitive globally -- that would require difficult improvements in technology that I'm not seeing enough of," he says. The most exciting technologies being developed, including robotics, rockets, artificial intelligence and the next wave of biotechnology, are several years down the road, Mr. Thiel argues. Mr. Thiel says he is sensitive to a challenge to pessimistic investors who prospered during the tough period of the past two years -- becoming overly negative. Some of his investors ask Mr. Thiel if he could lose serious money in the short term, he says, even if he is right over the long haul. He is sticking to his stance. "The government has helped stabilize the banking system, but I'm not sure we have a path toward sustainable growth," partly because consumers are dealing with debt and other issues, even as an energy crisis looms, he says. "It always feels unpatriotic to be negative. But too few people are focused on the real problems." —Alistair Barr contributed to this article. Write to Gregory Zuckerman at gregory.zuckerman@wsj.com