An article forwarded in to me:
Arnold’s hedge fund thrives as Amaranth falls
Centaurus gains approach 200% in ’06, but manager has an enemy in Houston
By Alistair Barr, MarketWatch
Oct 5, 2006
SAN FRANCISCO (MarketWatch) – One man’s trash is another man’s treasure. When Amaranth Advisors LLC was losing $6 billion at the hands of its top natural gas trader Brian Hunter last month, rival energy hedge fund manager John Arnold was busy making millions.
Arnold, head of $3 billion Houston-based Centaurus Energy, has generated gains approaching 200% so far this year, according to a person familiar with the former Enron trader and his fund. While Arnold, 32, didn’t purposely trade against Amaranth, he likely benefited when the firm was struggling to exit its losing positions, traders said. Arnold’s fund, which he started in 2002 in the wake of Enron’s collapse, has now become the largest hedge fund specializing in energy trading. Centaurus is one of the first places traders go when they’re seeking a market for natural gas positions. “They’ve set their tentacles into all of the liquidity pockets of the natural gas market,” Art Gelber, president of Houston-based energy consulting firm Gelber & Associates, said. “It’s certainly possible they made money from Amaranth’s troubles – they’re a really big player in the market and are knowledgeable enough to understand why Amaranth’s positions might have been vulnerable.” Marion Gammill, a spokeswoman for Arnold, said he declined to comment. “Phenomanal” returns Centaurus’ performance was equally good in 2005 – a year in which other hedge fund firms, such as Citadel Investment Group and Ritchie Capital, stumbled in energy markets. Returns reached 160% last year, roughly doubling investors’ money after fees, according to SparkSpread.com, a news Web site focused on energy trading. The firm’s first full year in 2003 was “phenomenal” and 2004 was even better, helping Arnold earn an estimated $100 million to $150 million that year, according to Trader Monthly magazine. Centaurus has been closed to new investment for several years and Arnold has been returning money to investors because he wants to ultimately have only his own money and his colleagues’ money in the fund, a person familiar with the manager said. Arnold has returned so much money that investors who got into Centaurus more than a year ago have probably got back more cash than they originally put in, the person added, on condition of anonymity. Arnold is tight-lipped about how he makes such big profits, but he gave a rare glimpse during this year’s annual meeting of Cambridge Energy Research Associates, a top industry consultant. Arnold said he looks to place bets when he thinks a market has become “biased,” moving prices away from what he considers fair value, according to a February report about the annual meeting by Platts Power Markets Week. After Enron’s collapse, Arnold said hedge funds stepped in to handle speculative trading in energy markets, while companies and investment banks took on other parts of the market, Platts reported. Arnold’s expertise is mainly in trading natural gas futures on the New York Mercantile Exchange, but Centaurus has diversified into many different types of energy trading. Centaurus is now investing in oil and gas exploration in the Gulf of Mexico. It’s also building underground storage facilities, allowing the fund to release and inject natural gas as demand and supply fluctuates. In late 2003, Centaurus entered into two swap contracts with Koch Supply & Trading LP, allowing Arnold to bet on the future volatility of crude oil prices versus heating oil. Centaurus’ biggest strength comes from its willingness to provide liquidity in natural gas markets all the time, said Nick Dazzo, who manages customer derivatives business in North and South America for Koch Supply & Trading. When energy companies want to lock in the price of the gas they sell one or two years into the future, Centaurus will take on that risk. The firm will also take on the opposite risk when a company that uses natural gas wants to buy it at a fixed price in the future, he said. “Investment banks and firms like Koch act as intermediaries in the market, but are limited in what risks they can take on,” Dazzo added. “Centaurus is able to take on more of this risk.” By interacting constantly with lots of different market participants, Centaurus gets one of the best insights into market movements, he explained. “They don’t sit back and attempt to divine the market without engaging,” he said. “They have a network of contacts in the market that they use.” High profile, low profile At five foot ten, with brown-reddish hair and boyish looks, Arnold seems younger than his 32 years, say people who have met him. While he’s often feted by brokers during excursions into Houston’s social scene, he remains low-key and conservatively dressed, according to a person who knows him personally and professionally. He recently got engaged. “He was delightful to work with and very down to earth and sincere,” said Elisa Bentivoglio, who designed the interior of Centaurus’ 8,000 foot offices in Houston. “He’s interested in art and culture. It was nice to have a client who appreciates good design.” But despite enriching his investors and trying to keep a low profile, Arnold has upset some people in Houston. He bought a historic property known as Dogwoods in the same up-scale River Oaks neighborhood as former Enron executives Kenneth Lay and Jeff Skilling. The house is next door to Bayou Bend, another historic home that’s part of Houston’s Museum of Fine Arts and is famous for its collection of American decorative arts. When Arnold began demolishing the home – valued at roughly $4.9 million with the land – he angered some locals who worry the city’s heritage is being developed away. “I’m an opponent of John Arnold and all he stands for,” said Jane Dale Owen, president of Clean, an organization that focuses on environmental issues in the Houston area. “He took some of the money that Enron stole from investors and used it to buy that house,” she added. “Now it’s been demolished and an ugly, modern house is being built in its place. I see it as ill-gotten gains for an ill-gotten purpose.” Arnold has yet to begin building his new home and the lot is currently empty. Last year, he told the River Oaks Examiner, a local paper, that he worked hard to find architects who would preserve the “integrity of the site and the neighborhood.” Like his energy trading, Arnold appears to only have become interested in buying the house after its price became more attractive. The home was on the market for roughly half of the past two decades and the price was cut drastically. Still, as Owen’s comments suggest, the regulatory taint of Enron continues to follow Arnold, possibly explaining why he rarely talks publicly. He has never been charged with any wrongdoing in connection with Enron. “We don’t really discuss what we do,” he said in a rare interview with the New York Times in January. Enron’s shadow As one of the most successful Enron alumni, Arnold is sometimes cited by critics of hedge funds’ participation in energy markets, claiming they’ve made prices more volatile for end users such as companies and consumers. In May, Dianne Feinstein, D-Calif., and Maria Cantwell, D-Wash., suggested that Centaurus and other hedge funds might be manipulating energy markets. “In the absence of much needed consumer protections, former Enron traders who played a central role in artificially inflating electricity rates throughout the West prior to Enron’s collapse continue to make millions in unregulated energy markets at the expense of American consumers,” the senators said in a statement. “One of the Enron traders who booked $750 million in natural gas contracts in 2001, subsequently started Centaurus Energy, a hedge fund company that trades energy commodities,” they added. “American consumers need to be assured that the dramatic escalation in oil prices is not once again the result of energy market manipulation.” Arnold, who graduated from Vanderbilt University, rose to prominence in Enron’s massive energy trading division, becoming head of natural gas derivatives trading. In 2001, when he was 27, he single-handedly made the company $750 million, according to the Houston Chronicle. In 2000, Arnold was often described by Enron public relations as the person who traded one-third of the natural gas market for the company, Platt’s Power Markets Week reported earlier this year. “He was not afraid of size,” said Tom Lord, president of the commodity-ma
rkets consultant Volatility Managers and a former Morgan Stanley natural gas trader. “In natural gas markets in the late 1990’s, there were probably four or five people willing to do large trades. He was one of them.” When Enron collapsed, the company sold a big chunk of its energy trading business to Swiss bank UBS AG. But Arnold decided to start his own hedge fund instead. Centaurus now employs more than 40 people and half of its roughly 20 traders used to work at Enron. Greg Whalley, Enron’s former president, works with Arnold at Centaurus. While Arnold is currently flying high, he remains sober about the future, according to a person familiar with the Centaurus manager. Arnold intuitively knows that what happened to Amaranth last month could happen to anyone, the person said. “There are lot of smart people in our business, but there’s also a fair degree of attitude as well,” Koch’s Dazzo said. “John is a very smart guy without the attitude.” End of Story Alistair Barr is a reporter for MarketWatch in San Francisco.