Peter Thiel & Clarium Capital's Huge Oil Services Play: 13F Filing Q1 2009 ~ market folly

Wednesday, July 1, 2009

Peter Thiel & Clarium Capital's Huge Oil Services Play: 13F Filing Q1 2009

This is the 1st Quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the Hedge Fund 13F filings series preface.

This week is 'global macro week' here at Market Folly and we'll be covering some of the equity positions of the major global macro strategy hedge funds. We want to start off this week with a slight disclaimer. Since global macro funds trade all different types of asset classes, they're not an ideal bunch to track or to clone a portfolio from. However, they are some of the smartest minds out there in terms of secular themes, trading, and market timing. As such, we monitor their movements in equities to get a sense as to what sectors they like, when they're moving out of long equity positions, and to see if we can see any secular themes they might be playing. So, this week is not so much about tracking as much as it is about taking a step back and observing the 'bigger picture.'

Next up in our series of global macro funds is Clarium Capital Management, LLC ran by Peter Thiel, the co-founder of PayPal. Clarium is a $2 billion hedge fund that has had the majority of its holdings in the debt and currency markets. Keep in mind that the equity portion of their portfolio has always been minimal, so the stocks below only represent a small sliver of their overall holdings. While they have indeed boosted their equity holdings, they still have their portfolio primarily invested in other markets. Additionally, we must also add in a second disclaimer that Clarium has been net short US equities in previous performance breakdowns we've seen from them. So, keep all that in mind when viewing the information below. 2008 was a roller coaster year for Thiel and company, to say the least. Earlier in 2008, they were up over 45%. But, with a mistimed move into equities, they began to give back their gains and found themselves -4.5% for 2008 as we noted in our year end post of hedge fund performance numbers. The bulk of the losses were sustained in October, where they were down 18% for the month. Assets under management had recently ballooned to the highest amount in Clarium's history, but that didn't last long as redemption requests rolled in and markets continued to tank.

Thiel's fund is unique in that it employs a slightly different management fee structure than most of the hedge fund world. Typical funds charge a flat 2% management fee on assets and then a 20% performance fee. Clarium, on the other hand, does not charge a management fee, but charges only a 25% performance fee. They obviously have more incentive to perform well, to ensure they get paid. And, 2008 didn't go too well in that regard. Thiel recently sat down and opined on numerous macro topics, including whether the US is the next Japan. Clarium hasn't necessarily fared to their liking as they were -1.4% for the month of May and were down 1.7% for the year as of that time (as noted in our hedge fund performances post where you can also see Clarium's performance breakdown sheet).

We track Clarium because we feel they are at the forefront of global macro thought and we like to see what they are extrapolating on a macro level. Over the past few weeks, we've covered some of their latest investor letters where they deliver some excellent market commentary. Additionally, we also covered their addendum to such letter where they evaluated a 'Macro Framework for Equity Valuation.' In the addendum, they examine valuation in two ways: from typical Benjamin Graham valuation and then also from a positive/negative liquidity standpoint. Both concepts are described in the letter, but you can of course get a better understanding of Graham's valuation by reading his well-renowned book Security Analysis (a staple in our recommended reading list).

At the recent Ira Sohn conference where numerous hedge fund managers presented investment ideas, Peter Thiel presented plenty of his own thoughts. He has opined that we will see inflation in things we need (commodities) and deflation in assets we own. And, we've sort of already seen that. Make sure you check out all of Thiel's thoughts from the conference as well.

The following were Clarium's long equity, note, and options holdings as of March 31st, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Some New Positions (Brand new positions that they initiated in the last quarter):
Oil Service Holdrs (OIH), McDonalds (MCD), Select Sector Energy (XLE), Oracle (ORCL), Nike (NKE), Reynolds American (RAI), Kimberly Clark (KMB), Fuel Systems (FSYS), Brigham Exploration (BEXP), Nexen (NXY), Post Properties (PPS), Best Buy (BBY)

Some Increased Positions (A few positions they already owned but added shares to)
Philip Morris International (PM): Increased by 80%
Procter & Gamble (PG): Increased by 50%
Diageo (DEO): Increased by 50%

Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)
Walgreens (WAG): Reduced by 83%
American Express (AXP): Reduced by 69%
Altria Group (MO): Reduced by 69%

Removed Positions (Positions they sold out of completely)
SPDR S&P 500 (SPY), Schering Plough (SGP), Mastercard (MA), Playboy (PLA), Exxon Mobil (XOM), Teradata (TDC), Burlington Northern (BNI), NCR (NCR), Meadow Valley (MVCO), Interval Leisure (IILG)

Top 10 Holdings (by % of portfolio)

  1. Oil Service Holdrs (OIH): 95.3% of portfolio
  2. McDonalds (MCD): 0.83% of portfolio
  3. Select Sector Energy (XLE): 0.72% of portfolio
  4. Philip Morris International (PM): 0.30% of portfolio
  5. Procter & Gamble (PG): 0.27% of portfolio
  6. Microsoft (MSFT): 0.24% of portfolio
  7. NRG Energy (NRG): 0.23% of portfolio
  8. American Express (AXP): 0.23% of portfolio
  9. Altria Group (MO): 0.17% of portfolio
  10. Hewlett Packard (HPQ): 0.15% of portfolio

We were tempted to only list their top 5 portfolio positions here because, let's face it, that's the only meaningful part of their portfolio. They had a mindboggling 95.3% of their long equity portfolio invested in oil service stocks via OIH as a brand new position. While this is not out of the norm for Clarium to have a large portion of their equity portfolio tied up in one position, it has never been of this magnitude before. As such, we don't want to try and extrapolate too much from it as it could have merely been a shorter-term play. After all, last quarter they had 21% of their portfolio in the S&P500 via SPY and then this quarter they don't have it in their portfolio at all. As such, these quick moves must be noted when examining their portfolio.

Assets from the collective holdings reported to the SEC via 13F filing were $527 million this quarter compared to $31 million last quarter. As you can see, there was quite a large jump in assets invested on the long side. At the same time, their $500 million or so invested on the long side still only represents one piece of their overall portfolio. We've covered in the past how Clarium has had the majority of its positions in the debt and currency markets. As such, this is the perfect example of an equity portfolio you would not want to clone or mimic. We use Alphaclone to clone hedge fund portfolios of value oriented, fundamental, long-term oriented funds as they are the easiest to track. Global macro or trading hedge funds are not ideal to track in this regard due to the fact that they have positions in other markets and their propensity to move in and out of positions faster. This is just one of the 40+ prominent funds that we'll be covering in our hedge fund Q1 2009 portfolio series. We've already covered:

- Gurus such as: Soros Fund Management (George Soros), and Jim Rogers.

- 'Tiger Cub' portfolios like: Andreas Halvorsen's Viking Global, Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, Lee Ainslie's Maverick Capital, Shumway Capital Partners (Chris Shumway), Chase Coleman's Tiger Global,

- Outperforming funds like: John Paulson's hedge fund Paulson & Co, Eric Mindich's Eton Park Capital, Raj Rajaratnam's Galleon Group,

- Value and activist funds such as: David Einhorn's Greenlight Capital, Seth Klarman's Baupost Group, Whitney Tison's T2 Partners, Philip Falcone's Harbinger Capital Partners, Ricky Sandler's Eminence Capital,

- Concentrated funds that play secular/macro themes such as: Timothy Barakett's Atticus Capital, Bret Barakett's Tremblant Capital Group, Boone Pickens' BP Capital Management, John Burbank's Passport Capital

- Global macro firms such as: Paul Tudor Jones' Tudor Investment Corp, Louis Bacon's Moore Capital Management,

- And, newer funds on the scene: David Stemerman's Conatus Capital. Check back each day as we cover new fund portfolios.

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