Trade of The Year
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Most traders regard late August as a time to take a breather. Not John Arnold. The 32-year-old head of Houston hedge fund Centaurus Energy had just laid waste to Bo Collins’s MotherRock, squeezing the New York fund caught on the wrong end of a long natural-gas position.
That was just an appetizer. Next in his sights: Amaranth’s Brian Hunter. The Calgary-based gunslinger was fresh off an amazing year in which he created an estimated $800 million in profits for his Greenwich, Connecticut, employers, earning himself some $100 million in the process. Nothing seemed to sate Hunter’s appetite for betting on natural gas, his bias heading into September’s peak hurricane season as long as the Western Canadian horizon on a clear day.
Was he overzealous—or just crazy? As one veteran natural-gas trader put it: “The guy really tried to keep the market up—he was out of control. He didn’t hide anything. Everyone, and I mean everyone, knew his position.”
While Hunter, operating largely without a leash, amassed humongous long positions in the natural-gas market, Arnold was quietly getting back in touch with his inner bear. The Centaurus crew, Enron alumni whose energy-trading prowess is so superb it renders impotent the description “the smartest guys in the room,” spent the latter part of 2006 snapping up short positions across the energy spectrum, including in crude oil, according to a Houston trader familiar with the portfolio.
Arnold and his team had concluded that energy prices in general had topped out. Quipped that same Houston trader: “When people are drilling through their bathtubs for oil in Piscataway, New Jersey, you know prices are too high.” In one of the more gutsy bets he’d ever made, Arnold wagered on lower natural-gas prices, hoping to catch a sharp sell-off. As the hot summer rolled on, massive spikes in volatility in nat-gas prices left the market rife with rumors that hedge funds had placed massive bets in the listed and OTC markets, prompting concerns over potential liquidity problems.
Arnold’s group has developed deep access into liquidity pools, including the physical marketplace (underground holding tanks), that extend far beyond the listed futures markets and Wall Street OTC dealers. In addition to allowing for better market intelligence, this approach also gives Centaurus a much greater degree of flexibility than its competitors, who largely confined their bets to listed markets.
The first shoe dropped in August, when Collins’s $400 million–plus MotherRock fund ran aground. In the wake of that sudden implosion, tongues wagged all across the Street that during the wounded fund’s painful unwind, competitors twisted the knife by bidding up prices—with Hunter’s Calgary-based desk at Amaranth cited as the chief culprit. “Because Hunter had billions behind him, he could really squeeze the hell out of you,” says one hedge-fund trader.
Within months, Hunter would become the hunted. He found himself massively long in the near months during September as prices collapsed, prompting losses that exceeded $6 billion and leading to the liquidation of the venerable fund. “Any energy trader worth his salt knew exactly where Amaranth and MotherRock’s positions were and would have been able to profit,” says one Wall Street energy-desk trader.
As the drama unfolded, some observers speculated that Arnold’s short positions allowed him to profit almost dollar for dollar in concert with Hunter’s losses. (Most traders we spoke with, though, dismiss this as a gross exaggeration.)
Nevertheless, there’s no question that Arnold emerged from the gas market’s wild summer swings supremely victorious, further cementing his $3 billion fund’s reputation as the preeminent speculator in the energy markets. Centaurus’s performance was reportedly around 200 percent for the year as of early October. One informed trader pegged the Centaurus haul at $1 billion.
So what was Arnold’s personal score? “I haven’t ever commented on this, and I don’t plan to start,” he tells Trader Monthly.
Regardless, it appears that no personal animosity is involved. We hear—but couldn’t confirm—that Hunter and Arnold went out to dinner in Houston just weeks after the dust settled. We’re guessing Arnold, having pulled off the undisputed Trade of the Year, picked up the check.
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