Natgas trading legend Arnold retires, ending era

By Jeanine Prezioso | NEWS.GNOM.ES – 

NEW YORK (NEWS.GNOM.ES) – Legendary natural gas trader John Arnold is closing down his flagship Centaurus fund, sources said o n Wednesday, ending an era in which the former Enron wunderkind defined the high-risk, big-reward energy speculator.

After two years of struggling to maintain outsized returns as gas prices sank to 10-year lows and trading regulations grew tighter, Arnold told investors he would return their funds and pursue “other interests,” according to an investor in the fund who had received the letter.

Natural gas prices tumbled after news of the fund’s closure, ending the day down nearly 5 percent.

Centaurus, famed for gaining more than 300 percent in 2006 by taking bets opposite to those held by failed rival Amaranth Advisors, was the most successful energy hedge fund ever, boasting a compound annual return of about 130 percent.

Formed in 2002 when Arnold was a 20-something whiz kid from Enron, Centaurus grew to as much as $5 billion at its peak, earning him a personal fortune estimated at $3 billion.

In recent years, Arnold’s pledge to give away three-quarters of his fortune drew more attention than his trading prowess.

At the fund’s offices in Houston, a 65-story blue glass skyscraper that is a landmark in the posh Galleria area, several casually dressed employees entering the Centaurus suite declined comment, saying only: “He’s retiring.” A person who answered the phone there said no one was available to comment.

Arnold and his fund drew measured praise from some peers and rivals who have watched his career — often with awe — over 17 years. But there was little surprise at his move.

Arnold had thrived on the extreme volatility of the natural gas market, once the Wild West of commodities. But booming output of shale gas in recent years has produced a glut of natural gas in the United States, taming prices which have plumbed their lowest levels in a decade.

“I think his style, and how the market was during his time of trading, was really legendary. He just kept making returns with that kind of volatility,” said former Sempra star gas trader Todd Esse, who now manages about $500 million at hedge fund Sasco Energy Partners in Westport, Connecticut.

“Success never went to his head, that’s for sure.”

In 2006, Arnold formed NGS Energy, a natural gas storage company. NGS sold one storage asset, Tres Palacios in Markham, Texas, in 2010 to Inergy Midstream LP.

Arnold, a native Texan, graduated from Vanderbilt University in Nashville, Tennessee. He started trading oil at Enron before he moved to the natural gas desk, where he drew an $8 million bonus, according to reports.

He used that money to start Centaurus.

The Centaurus Energy Master Fund is the biggest one that is open to outside investors, the source said. Arnold had a total of about $4 billion assets under management last year, although the source estimated that the Master Fund held around $2 billion.

The fund suffered its first-ever annual loss in 2010, and Arnold, who turned 37 last year, reduced its size because of diminishing market volatility and tough new limits on commodity speculators. He returned $1 billion of capital to investors last summer. The fund gained less than 10 percent in 2011.

Natural gas futures extended earlier losses by about 5 cents per million British thermal units (mmBtu) on news of the fund’s closure, halting a recent rebound in prices from a 10-year low hit two weeks ago.

Some traders said Arnold may need to unwind positions to close out the fund. Other analysts said the losses were a reflection of waning faith among traders that natural gas is going to recover any time soon.

“When people see this big a speculator getting out of the game, there is a possibility that, because fundamentals are weak anyway, it does take confidence out of the market,” said Phil Flynn, analyst, PFGBest Research in Chicago.

ON THE HILL

Arnold is not the only commodity fund manager to bow out after one of the industry’s most difficult years. Pierre Andurand and his partners said a month ago they would shut down BlueGold Capital, an oil-oriented fund, after a 35 percent slump in 2011. Billionaire George Soros said a year ago that he would stop managing outside money, converting his fund to a family office.

Like many hedge fund managers Arnold shunned the media, but his youth and success drew widespread attention, and he was called to testify before Congress in 2008 as soaring energy prices prompted a political attack on speculators.

Traders said U.S. regulatory moves toward position limits on speculation in commodity markets may have constrained a trader like Arnold accustomed to placing big bets. Centaurus has been hit with small fines in recent years for violating position limits on NYMEX natural gas.

In recent years Arnold has focused more on philanthropy. In 2008, he and wife Laura founded the Laura and John Arnold Foundation, which funds a variety of causes in areas including criminal justice and education.

Arnold also was among those wealthy individuals who was part of Warren Buffett’s “The Giving Pledge,” pledging to give away 75 percent of his wealth over his lifetime.

(Additional reporting by Bruce Nichols, Barani Krishnan, Edward McAllister and Jonathan Leff; Editing by David Gregorio)