By Leah McGrath Goodman
Illustration by Andrew Clark
It is one minute before the market’s close in the final days of John Arnold’s first down year. The door is open to Arnold’s corner suite in the Houston office of Centaurus Advisors, and the nation’s youngest hedge fund billionaire is brooding. Hunched over a desk scattered with papers, he sits motionless, hair tousled, shirt rumpled, no tie. The celebrated energy trader has a lot on his mind: a coal company that’s turned into a money pit, his firm’s third trading violation in two years, the $725 million sale of a Texas gas hub—and a futile last-ditch attempt to plug a hole in his $5 billion portfolio.
Since Arnold launched Centaurus out of the ashes of Enron in 2002, he has boasted an unheard-of compound annual growth rate of about 125%, prompting many of his investors to assume he would forever rake in outlandish returns. Yet 2010 proved to be the 37-year-old’s first grand reckoning, as sweeping structural changes in the market forced him to accelerate his shift away from trading into buying real assets—a vertical integration model that appears to be an attempt to create a mini-Enron.
Arnold has little choice but to try. Last year, breakthrough gas-drilling technology flooded the marketplace with excess supply, knocking the froth out of prices and undercutting the depth, volatility and profit profile of the natural gas market, Arnold’s primary hunting ground. On top of that, new trading rules clipped the wings of speculative heavyweights like Arnold, limiting the size of the bets the former Enron trader can take in a market that has traditionally fed his fund’s formidable bottom line. The result: Arnold was forced into 11th-hour asset sales to patch up the losses in his portfolio, which still shed nearly 4% of its value on the year.
While the stumble proves even Arnold cannot always beat the market, people close to Centaurus say it was not him but one of his traders who drove returns into the red with a bullish natural gas bet that dragged down the fund’s performance. At the end of October, Centaurus was down more than 8% for the year. That said, Arnold’s inability to stem the losses suggests he may be struggling in a market where all the rules have suddenly changed. With the dawn of a new decade comes the obvious question: Are Arnold’s best days behind him, or can he bounce back to the triple-digit gains that made him a legend?
Admittedly it’s a high-class problem. “A lot of people are saying, ‘John’s made his billions, now he’ll just take his chips and go home,’ ” says Javier Loya, chief executive of Houston brokerage Choice Energy, who has known Arnold since he started at Enron and counts Centaurus as one of his firm’s top clients. “But they don’t know John the way I do. I think these new challenges excite him and stimulate him. The one thing about John is he’s hypercompetitive.”
Though few have been able to match Arnold’s affinity for extracting outsize gains from the historically tumultuous commodities market, it is a rarer trader, still, who can exit his comfort zone to successfully defend a near-impossible track record. Going upstream has already put the fund at risk in new and untried ways, but Arnold the trader seems ready to try on the role of Arnold the deal maker.
“They’re trying to rebuild Enron, get into the physical side again,” says one hedge fund executive who knows most of the fund’s traders. “They have all this money and they’re getting bored. The market isn’t what it used to be. There’s no volatility in natural gas—it’s just dead.”
John Arnold has been mythologized ever since his rise from the collapse of Enron—all without revealing very much about himself. Almost infuriatingly, he gives only the simplest of explanations for his epic trading performances, which have allowed him to cement returns of more than 300% in a single year. “We rely almost exclusively on fundamental analysis to guide our trading strategies,” he testified before the Commodity Futures Trading Commission in 2009—a statement seemingly designed to dispel any rumors that he merely exploits the trading game better than anyone else.
But last year’s revolution in energy fundamentals and crippling trading rules are taking their toll. Long considered the $1,000 table at the energy casino, natural gas—the lifeblood of the nation’s power plants—has suddenly moved into $100 table territory, spurring fears that most of the easy money is gone. In 2010, gas prices stuck to a narrow $3 trading band, compared with the wider price swings of the past, and the U.S. Department of Energy recently noted that year-over-year implied volatility has dropped about 12 percentage points. None of these factors bodes well for a trader with $5 billion to invest. “Even if you’re talking about the entire energy futures universe, at these price and volatility levels, the market is just not deep enough for John to make money,” a rival commodities trader says.
|John Arnold: “We rely almost exclusively on fundamental analysis to guide our trading strategies”|
The glut of gas is driven, in part, by innovations in the technology behind natural gas production called hydraulic fracturing, or “fracking,” which have unlocked huge quantities of new supply once deemed out of reach. Fracking blasts water, sand and chemicals at tremendous pressures into pockets of gas trapped inside rock deep below the earth’s surface. At the same time, fresh discoveries of gas reserves and a hefty expansion of U.S. gas storage capacity are, in the words of Conrad Goerl, one of Arnold’s gas traders, “going to make gas a very cheap and boring market for the next few years.”
Last year drilling tests in Alaska’s National Petroleum Reserve showed that 90% of the oil estimated to be in the ground was, startlingly, gas. In December, the statistics branch of the DOE projected gas production would grow through 2035, estimating that during the past year “technically recoverable” unproved shale gas available in the United States had more than doubled to 827 trillion cubic feet. (Shale is a fine-grained sedimentary rock that can be rich in gas or other petroleum resources.) All of this means that the gas market supply panics of yesteryear are likely over for the time being. Since 2008, front-month gas futures on the New York Mercantile Exchange have plunged from a high of more than $13 MMBtu to drift between $3 MMBtu and $6 MMBtu for much of 2010.
Meanwhile, new exchange-imposed trading limits rushed out over the past couple years are wreaking havoc on large traders’ profits, a trend expected to continue this year and beyond as the federal government puts the final touches on additional restrictions cobbled together on the back of the Dodd-Frank Act.
Arnold, who saw the shale game coming from a long way off, positioned himself to take full advantage of that. But he’s been less victorious at persuading the CFTC, the watchdog agency for the futures market, to rethink its new rules regime. which threatens to further gum up his trading operation. That’s not surprising, since Centaurus has been dinged three times by Nymex for violating position limits. (The latest instance came at the end of 2010, when Centaurus was fined $15,000 and forced to disgorge profits after going 5.5 contracts above the limit while taking a short position in gas.) Confronted with rules that might undermine his position in the market, Arnold made his first public appearance in Washington in August 2009 to tell the CFTC how it might tame the energy market. His testimony was, by and large, derided as a star trader’s thinly disguised attempt to preserve his sacred trading ground.
While Arnold made some good points, he did not have much sway over government regulators. The CFTC still remembered summoning him to give two days of grueling testimony in August 2002 in the wake of Enron’s meltdown. Back then, they were investigating allegations of Arnold calling down to the Nymex trading pits for inside information while running the gas-trading desk at Enron when he was in his early twenties. (This is a lot harder to do these days, since most of Nymex’s trading volume has migrated to the screen from the pits.) The following year, the CFTC would subpoena dozens of hedge funds’ trading records and pressure at least one Nymex clerk to wear a hidden tape recorder meant to entrap Arnold. The clerk refused, but he confirms Arnold was a key target. According to “The Smartest Guys in the Room,” the book on Enron by Bethany McLean and Peter Elkind, Arnold praised fellow traders at Enron in performance reviews for “learning how to use the Enron bat to push around the market” and “use position to force markets when it’s vulnerable.” Arnold later told investigators that he didn’t actually think Enron was manipulating the market and that now he sees his comments “in a different environment than what I meant it at this time.”
Arnold has never been accused of being part of the wider schemes cooked up by some of Enron’s traders to manipulate electricity markets. But suspicion lingers. According to Senator Dianne Feinstein (D-Calif.), he invoked the Fifth Amendment when asked during a deposition if he manipulated markets at Enron. At Centaurus, this was considered a cheap shot.
Although a few old e-mails written by Arnold while at Enron hint at his brush with the dark side, Centaurus has never received such negative attention—even from its adversaries. “John and I were huge competitors for a long time when I was trading for El Paso and at MotherRock,” says J. Robert Collins, former Nymex president and head trader at MotherRock, an energy hedge fund that closed in 2006, the same year Arnold posted some of his heftiest gains. “He is an honest broker... Earlier in his career, I think he went through the usual amount of bravado, but I think he is a genuinely humble person and that really informs his character. As a result, he treats people the way he’d like to be treated.”
Behind the deep-blue-tinted glass doors of Centaurus (through which one can neither see in nor out), Arnold occupies a windowless corner suite on the eighth floor of a gleaming office tower on Houston’s Post Oak Boulevard. Arnold declined to comment on the record for this story, but AR was allowed to visit the trading floor, off-limits even to some of the fund’s secretaries. A single pane of glass separates Arnold from his band of about 20 traders, mostly men in their 30s and 40s, who gather each morning around a communal trading desk in a 1,000-square-foot room. There is a soda fountain–style bar to the right, where food and drink are served, and a bank of windows to the left. The walls are bare, save for a map of the U.S. natural gas pipeline system, the only visible clue as to what fires Arnold’s mysterious money machine.
Solely owned by Arnold, Centaurus draws the bulk of its earnings from making markets in natural gas and electricity, but the fund’s traders also bet on crude oil, coal, fuels and other commodities in the futures, options and over-the-counter swaps markets. Arnold, who owns about two-thirds of the assets under management, launched his flagship vehicle, Centaurus Energy Master Fund, in 2002, quickly amassing billions from what started out as an $8 million bonus from Enron, just as it was skidding into bankruptcy.
In 2005, Arnold closed the fund to new investors and raised his fees to 3 and 30, retaining a modest stable of wealthy clients and funds of funds. To this day, the investors who made the cut act as though they barely squeaked into a VIP room from which they might still be ejected. Interestingly, they are afforded very little information about what Arnold is doing and appear to know even less about the magnitude of his foray into hard assets.
Two years later Arnold gate-crashed the Forbes 400 Richest Americans list, which anointed him, at age 33, the youngest billionaire in the country. That pronouncement marked Arnold’s initial piercing of the public consciousness, but it was merely icing on the cake; he’d already been crowned the unofficial king of commodities by his fellow traders. “I have never seen such universal adulation in a sector the way the commodities sector adulates him,” says a former executive from a hedge fund that competed actively—albeit unsuccessfully—with Arnold. “Most people who watch this space believe him to be the best trader that ever lived, full stop.”
Arnold cut his teeth on the oil-trading desk at Enron after graduating from Vanderbilt University in 1995, earning a bachelor of arts in three years. Double majoring in math and economics, he impressed his professors as being intelligent and inquisitive. “I had him for an economics policy course, and he didn’t just accept the answers given him because I was the teacher,” a professor says. “He pushed you and he pushed others, but never in an obnoxious or aggressive way. He wanted to understand how things worked and would ask questions both inside and outside of class. He was not satisfied with just good grades or pat explanations.”
The youngest in a family of four, Arnold comes from a middle-class family unaccustomed to the kind of riches he now enjoys. His mother, an accountant, and his father, a lawyer, started out in Pittsburgh before moving to Dallas, where Arnold was born. He grew up playing soccer and camping in the Ozark Mountains. His father died when he was 17, and Arnold remains extremely close to his mother (who has worked as an accountant at Centaurus) and his brother, Matthew (two years his senior and retired in London), who joined him at Enron after graduating from Duke University.
Arnold soon moved from the oil-trading desk to the more challenging gas market, where he took over Enron’s multibillion-dollar gas-trading book before he turned 25. There, he got a foretaste of what it meant to wield unprecedented market dominance, personally churning through $1 billion of contracts on Nymex a day. He traded so much that the thousands of speculators who ruled over the New York trading pits knew him by name. Following Enron’s implosion, the Federal Energy Regulatory Commission would conclude that EnronOnline, the electronic-trading platform where Arnold plied his trades, was so powerful that it gave traders more ubiquity than any speculators have ever had before or since.
After being put in charge of Enron’s gas-trading book, Arnold, at 26, went from being up $200 million to down $200 million in less than a month. Yet in an event that later inspired a scene in “Enron: The Musical” (which closed almost immediately after opening on Broadway last spring), Enron CEO Jeff Skilling came down to the trading floor and put an arm around Arnold to show he still backed his top trader. When Enron filed for bankruptcy in 2001, Arnold’s bonus was the biggest check cut for earning Enron $750 million in its final year, more than any other trader.
Now time spent at Enron is considered a badge of honor among energy veterans, but when Arnold was attempting to launch Centaurus—located just seven miles from Enron’s headquarters—the “E” was nothing less than a scarlet letter. It wasn’t clear during the Enron investigations which traders would be prosecuted or spared, making it nearly impossible to invest with any of them until the dust cleared. A London hedge fund partner recalls meeting with Arnold around that time about investing in Centaurus. He found Arnold to be smart and painfully introverted. “John was looking to raise capital. He was very nice, bright and not at all a schmoozer. We didn’t invest with him, but obviously we’re sorry about that now.”
Centaurus comprises men hailing from Enron, the Nymex trading pits, a handful of Houston trading firms—even hedge funds Centaurus has beaten and subsequently swallowed. Arnold’s 70-strong staff includes former Enron president Lawrence “Greg” Whalley (the boss who defended Arnold’s wayward bets to Skilling when Arnold feared for his job) and Jeffrey Bussan, Arnold’s predecessor on Enron’s natural gas desk. One of Centaurus’s founding traders, William O. Perkins, got his start at Nymex before trading against Arnold at El Paso Corp., while Conrad Goerl also started at Nymex before decamping to MotherRock to do the same. Centaurus’s small army of traders reflects Arnold’s emphasis on intellect and discipline, but he also gives his team a significant amount of freedom with his money. “At Centaurus, everyone has their own book and trades their own way,” says Perkins. Compensation follows the customary eat-what-you-kill paradigm.
Known for his research and analysis of everything from minute shifts in weather patterns to the frequency of tanks arriving at ports that dot the Gulf Coast, Arnold surrounds himself with some of the best speculators, meteorologists and researchers in the country. “He wants the smartest people he can find,” says the former hedge fund executive, who met with Arnold to give him a referral for Goerl after MotherRock went under. “He wants the guys with the intellectual horsepower, but what he also wants to know is if you are disciplined. Will you get up early and do the work? That’s all he cares about.”
Arnold is also known for being a hands-on manager. In October 2008, when an unaffiliated hedge fund called Centaurus Capital in London fell on hard times and faced a flurry of redemptions, Arnold personally worked the phones to make sure his fund was not being confused with the one across the pond.
Like any savvy hedger, Arnold donates to both the Republican and the Democratic parties, but in 2008 threw the bulk of his monetary support behind Barack Obama, hosting a swank event in Houston at the Pelham Avenue home of Perkins, which raised hundreds of thousands of dollars. “The event wasn’t held long before Obama swept the primaries,” says an attendee. “But at the time we joked that, knowing John’s Midas touch, Obama would be a shoo-in for president.” Obama reciprocated, sending invites to his inauguration and, most recently, the White House Christmas party.
Besides rubbing elbows with the nation’s political elite, Arnold enjoys other perks. In a bend along Houston’s Buffalo Bayou waterway on the prestigious Lazy Lane Boulevard, he is building a 20,000-square-foot dream home made from a combination of French limestone called Valdenod and African Afromosia wood. The contractors, who have been working on the house for three years, are about to finish the rooftop, which is made of copper penny. “The owners are very private people,” the foreman says, “but this is a truly one-of-a-kind house.” Arnold purchased the land in 2004, razing its original French Norman–style mansion called Dogwoods in a move that ruffled the feathers of Houston’s history buffs. In its place now rises a hulking monument to cubism designed by New York architect Alexander Gorlin. It will not only house Arnold’s family of four (his wife, Laura, a Yale law grad and adjunct professor of management at Rice University’s Jones Graduate School of Business, and their two daughters), but also his formidable modern art collection, which features pieces by Picasso and de Kooning.
There is a school of thought that says Arnold is a cowboy energy trader who will stop at nothing to wring the market of all its value. But traders who’ve bet against him think otherwise. “John is extremely careful about money,” says Collins. “He does not take money lightly. He trades only to win, and if he doesn’t see a winning trade, that’s a day he won’t be trading. He has discipline that other traders don’t have and is aware when there are just no good trades around. He won’t overtrade, which is a problem you see with a lot of these traders. You have a lot of guys who lose money doing that or who might do well on a couple big trades that are really easy and then end up just losing a lot. He will, however, accumulate two or three big positions a year that he considers to be risk-free money or close to it. Honestly, I think he would do it 10 times a year if he could find it.”
In many ways, Centaurus represents a kinder, gentler Enron with all the brilliance and—so far at least—none of the scandal. Yet it would be misleading to gloss over that Centaurus is increasingly looking like a simulacrum of its predecessor, which has led some to wonder whether Arnold hasn’t managed to squeeze out of the Enron crosshairs only to reestablish his house advantage elsewhere. For his part, Arnold is the first to acknowledge that his perch at the pinnacle of the gas market affords him an outstanding aerial view of the energy jigsaw. “Nuclear, coal, hydro and renewable power generators have revenue streams linked to natural gas,” he has said.
In the twilight of Enron, Arnold was able to make one important observation: Enron drew the bulk of its profits from trading and pipelines, but its colossal speculative profits were not sustainable in a market too volatile to last. Arnold has wasted no time at Centaurus delving deep into the realm of physical energy investments. In 2006 he formed NGS Energy, a whollly-owned subsidiary in Westport, Conn., natural gas storage company that develops, owns and operates gas storage hubs, pipelines and underground salt caverns across North America with a working capacity of about 150 billion cubic feet.
The NGS portfolio covers highly strategic areas of Texas, Louisiana, Mississippi, Colorado and Arizona. Its next project, the $500 million Leaf River Energy Center in Taylorsville, Miss., is slated for completion by April. An underground salt dome complex hooked up to six pipelines, Leaf River offers 48 billion cubic feet of working gas capacity. Late last year NGS also sold Tres Palacios, a gas storage hub in Markham, Tex., to energy storage and transportation company Inergy for $725 million. That asset sale, and possibly others, helped limit Centaurus’s losses in 2010, according to an individual close to the fund. Centaurus and NGS declined to comment.
Arnold also has dipped into development projects outside U.S. borders. In an undertaking representing one of the biggest dollar-denominated private investments in Central America since the Panama Canal, he is helping finance an $800 million, 525 megawatt, gas-fired power plant in El Salvador. An international power line expected to be completed this year connecting six Central American countries will allow for wide distribution and scalability of the plant’s electricity.
While the project has yet to break ground, the plan includes an oversize desalination plant that will provide fresh water to 25,000 people in nearby towns and cities. The plan also envisions a $400 million gas pipeline for industrial users. The project, headed up by Perkins, will bring communities south of the border affordable, cleaner-burning electricity to offset the region’s dependence on dirtier, more expensive fuels. Arnold’s stake last clocked in at 7.4%, with other Centaurus traders taking a minority interest. Perkins holds the balance of the equity.
By investing in hard assets underlying his gas trades, Arnold has assumed the unusual role of both speculator and producer, invading what has long been considered the hallowed preserve of Big Oil. Though Arnold’s area of expertise is not project management, he has a unique edge in that he is able to carve out most of the risk of buying, selling or building a natural gas storage cavern, a power plant or a pipeline. He can determine the risk-reward profile and the price spread of a basket of upstream investments that he selects, then tailor a specific strategy to hedge against its risk by using a portfolio of energy derivatives.
Arnold’s former affiliation with Enron has helped. Drawing from his voluminous Rolodex, he’s hired a group of faithful lieutenants to assist him with the demanding logistics of project management. Laura Luce, a former Enron colleague, runs NGS Energy, while David Haug, former senior executive at Enron from 1992 to 2000, has acted as an adviser on the El Salvador project. A co-founder of Houston consultancy Arctas Capital Group, Haug specializes in arranging complex energy transactions.
In the past, Arnold has put on trades to exploit opportunities where the supply-and-demand fundamentals of a market did not add up, but as an asset investor, he has the ability to snap the market back in place. In essence, he gets to play both sides of the energy chessboard. “Trading is a guessing game,” Perkins says. “Assets are a knowing game.”
Nowhere was this more apparent than in the three-way duel to the death that was the infamous Amaranth Advisors debacle, in which Brian Hunter, a trader at the Connecticut-based hedge fund, sank billions of dollars into the natural gas market in 2006, expecting a busy hurricane season. When the storms did not materialize, he lost on the bet and his fund went under, taking MotherRock, Collins’s fund, with it. On the other side of that bet was Arnold, who went short and earned Centaurus a stunning 317% return that year before fees. Personally, the trading coup earned him almost $2 billion.
“I know from personal experience John’s particular style,” says Collins, who adds that Arnold’s fund was behind more of its trades than any other global player when Collins was Nymex president. “He likes being short. He plays the market from the short side, and he does it very well. He has a gift for understanding when a market’s going to take off or fall apart and gets in front of that trade. John’s very good at understanding which players are overexposed and where the different players stand, whose days are probably numbered and whose aren’t.”
The Amaranth face-off resulted in a nationwide spike in natural gas prices just before winter, stoking public outrage. While Hunter was found guilty by an FERC judge of market manipulation almost a year ago, unresolved territorial issues between the regulatory agency, which monitors the physical energy market, and the CFTC, which oversees futures, has delayed Hunter’s sentencing or settlement.
“The inside joke on Brian Hunter is that he was the best thing that ever happened to the U.S. gas industry,” Perkins says. “Hunter was the inadvertent savior of gas prices for this entire country." The argument is that Hunter’s trading created the economic incentive to build gas storage, which, combined with the boom in natural gas drilling, has resulted in lower prices.
John Arnold is one of those who got into the storage business, launching NGS Energy in the year of Hunter’s spectacular flameout. Despite his billions, Arnold had to struggle to get the bank loan to launch NGS Energy, one of his associates says. “The economy was starting to fall out of bed at that time, but he managed to do it.”
Still, the tricky part about becoming a market titan is that you can end up in your own wake. In a way, Arnold is a victim of his own success. Being the best trader isn’t half as rewarding if your opponents aren’t both well-capitalized and in existence. “Arnold has leagued himself out of so many trading arenas, there aren’t that many people left for him to go up against,” says the former hedge fund executive. “A lot of the heavyweights who he made so much money off of are gone. You don’t have all this big dumb money lying around anymore. Relatively speaking, it’s not even that large a market. And here you have John Arnold; he wins bets, but there’s no one left to bet against him.”
For those who fear Arnold’s moves into hard assets might give him undue power, it’s worth noting that at least one of these investments has not worked out. After profitably flipping a 6.6% stake in National Coal, a Knoxville, Tenn., coal-mining company, in 2007, Arnold decided to come back for another round, buying a 10% stake for about $25 million in 2008. In September of that year, he also began a string of purchases of National Coal’s 10.5% senior secured notes that ultimately totaled $30.3 million of the company’s $42 million principal. In a filing, Centaurus disclosed that “the fund believes that the notes represent a good economic investment...particularly given the 10.5% interest rate and the underlying assets of the issuer.”
Arnold also began meeting with the company’s CEO, Dan Roling, who says Arnold was pursuing a hedging strategy that included a potential leveraged buyout. “John and I met for dinner a couple times in Houston in 2008, and he was very friendly, very professional,” says Roling. “He listened and asked thoughtful questions. But the fund would not sign a nondisclosure agreement, so we did not want to share inside information with him.”
When the economic downturn slashed the company’s coal sales by 50%, National Coal began hemorrhaging money. Arnold extended a $5 million short-term loan in late 2009, but when some of National Coal’s industrial users failed to honor their contracts, the company defaulted. National Coal sought help from Centaurus in early 2010, but the fund declined to increase the credit line and, according to one of the company’s SEC filings, “asserted that we were insolvent” and “threatened to accelerate the outstanding indebtedness” under the loan, “which likely would have caused us to seek protection under federal bankruptcy laws.”
The kerfuffle effectively drove National Coal into a shotgun wedding, despite Roling’s efforts to persuade Arnold to be patient. Ranger Energy Investments, the acquisition vehicle of millionaire businessman Jim Justice of West Virginia, bought the company for $1 a share last year, a fraction of the company’s year-earlier price. An affiliate of Ranger made Arnold whole on the $5 million loan and $30.3 million of senior notes, but Arnold took a bath on the $25 million equity investment when National Coal’s stock tanked.
“In my view, because Arnold pulled out when he did, it triggered a series of events beyond our control,” says Roling. “I understand how investors work, but this company was poised to expand and grow. Their decision ultimately ruined our ability to move forward. In my opinion, they could have made a lot more money on their investment if they hadn’t been so impatient at the end. There were things that happened as a result of that decision that wouldn’t have happened if they hadn’t done what they did.”
Roling acknowledges that at every juncture Arnold extended numerous courtesies. “Once John makes a decision, that’s it, he moves on. But once he knew the outcome that he wanted, he worked with me not to destroy the company while achieving his goals.”
Looking ahead Centaurus might not be so bullish on coal, but it will be bracing for this year’s barrage of federal trading guidelines, which it expects will clog the energy market indefinitely. It also expects that while the gas glut will continue to depress prices in the near term—trading at parity with coal or lower—a rebound may come further along the curve as new rules and regulations limit fracking in the months ahead, due to a rash of environmental concerns.
True to form, these convictions are already coloring Centaurus’s investment thesis. Saddled with position limits, “people are backing out of the energy market because they have less ability to put on a big hedge,” Perkins says. “Investors are spooked. Producers need hedgers with deep pockets. The conventional wisdom right now is that the market should not be dominated by these big hedgers, but that’s exactly what the producers need to keep up these big drilling projects. They’re hedging, what, hundreds of thousands of contracts a year? That’s a massive, massive risk spread. Small players in this market cannot help them with that.”
While Washington’s ideal is to have a diverse ecosystem of small, medium-size and big players, the energy market tends to be a zero-sum game where the smaller players either implode or grow by increments to become gargantuan. At Centaurus, Arnold has exerted no small effort in trying to keep the fund from ballooning by regularly disbursing his profits to investors.
Arnold may feel a little less stifled sinking his millions into an unregulated commodities market of a different type.
This past November, Arnold caused a stir in the art world when he snapped up a Gerhard Richter painting at a Sotheby’s auction in New York. Beating back the competition after several rounds of feverish bidding, Arnold plunked down $13.2 million for an oil on canvas titled “Matrosen” (German for “sailors”) that overshot the $6 million to $8 million asking price. Sotheby’s wouldn’t disclose the identity of the buyer, but one of Arnold’s friends confirmed the purchase, remarking, “John has a passion for art, and he has a good eye for it.” Richter, now approaching 80, has experienced an upsurge of interest in his work of late. No doubt, Arnold has done his homework on the East German artist who, fittingly, helped lead the 1960s Capitalist Realism movement.
“With John, it’s not just about the energy market,” says the friend, who was not surprised to hear that Arnold trounced the other bidders. “It’s about anything he sets his sights on. He loves the game. He’s just the same guy we’ve always known who hates to lose.” AR
(Leah McGrath Goodman’s book, “The Asylum: The Renegades Who Hijacked the World’s Oil Market,” will be published February 15 by HarperCollins and reviewed in the March 2011 issue of AR.)
FACT FILE: CENTAURUS ADVISORS
Assets under management: $5.0 billion (January 1, 2011)
Flagship: Centaurus Energy Master Fund
Performance:125% annualized since 2002
Founder: John Arnold
Due to a misunderstanding between the parties, this article has been edited from the original version to remove certain quotes attributed to Bill Perkins.