John Arnold: Wall Street's king of natural gas

published 15 May 2012

Twelve years ago when John Arnold was just 26 and at Enron, he was responsible for trading one-third of the American gas market each day. Never implicated in any wrongdoing at the energy giant, he emerged as a chief beneficiary of its collapse in 2001.

Assembling some of the firm's top energy traders, he launched his Centaurus fund, earning the Wall Street moniker "King of Natural Gas" as he made huge returns. Now, aged just 38 and worth $3.5bn, Arnold is retiring: he is closing his fund to focus on philanthropy.

The "former Enron wunderkind's" timing looks spot on, says Reuters. With natural gas prices at a ten-year low, and new regulations biting, the triple-digit returns Arnold once delivered are a thing of the past. As one disappointed Houston broker observes: "Our market's loss is going to be humanity's gain."

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

"A painfully shy, middle-class kid who lost his father at the age of 17," reports CNN, Arnold "was a sharp student who impressed his professors" at Vanderbilt University in Nashville. Graduating with a degree in maths and economics, he joined Enron straight out of college, says the Daily Mail, becoming "a major force" behind the company's rapid rise in the 1990s.

He was credited with earning three-quarters of a billion dollars in 2001 alone, for which he received the largest bonus in the firm's history: $8m. Arnold used the cash to set up Centaurus in 2002, cleaning up during a period of extraordinary price volatility.

Arnold's biggest coup was taking a huge counter-position against Brian Hunter's commodities fund, Amaranth, in 2006 betting that prices would fall. Proved right, he reaped close to $1bn in profits. Amaranth, which lost $6bn, went bust.

Despite his reputation as the ultimate high-risk, big-reward energy speculator, he cuts an unusual figure "in the small world of the Houston ultra-wealthy", says the Houston Chronicle. Not only has he kept a low profile but his wife, Laura, a former corporate lawyer and businesswoman, is a dyed-in-the-wool Democrat, and both have signed Warren Buffett's "Giving Pledge", committing to give away most of their money before they die.

"The polar opposite of cheque-writers who are happy to support a good cause and happier still if their name ends up on the side of a building", the couple epitomise the new breed of activist philanthropists. They target their $700m foundation at causes ranging from criminal justice to state schools, notes Reuters. They gave away $101m last year.

"We have the benefit of being young so we can look at very complicated problems," said Arnold in a rare interview last year. "We have years to see these through." However, it remains to be seen whether someone as passionate about the market as he is "can stay out of the game" for long.

What tamed trading in the wildest market ever?

John Arnold is in an enviable position, says The New York Times: "he can afford to walk away". He joins an "elite but growing club" of big shots who have returned cash to outside investors this year, including hedge fund pioneer George Soros and the activist investor Carl Icahn.

Both men cited regulatory overkill as being among their reasons for leaving. With both hedge funds and the commodities markets facing "unprecedented new regulations and oversight", Arnold who lobbied vigorously against the changes was facing a double whammy of new trading restrictions. Who can blame him for quitting while he was ahead?

In fact, what really tamed trading in the "wildest commodity ever" was the runaway success of fracking, says Jeanine Prezioso on Reuters. The shale gas drilling boom has led to such a glut of natural gas in America that trading ranges have narrowed to the point of unprofitability. Thus Centaurus the most successful energy hedge fund ever at its peak, boasting a compound annual return of 130% registered its first ever loss in 2010, and has been struggling to maintain momentum ever since.

"Whenever a market crashes it seems that all the dirty laundry gets hung out. This record NatGas low will likely be no different," says WallStreetOasis.com. It has revealed grubby antics at America's second-largest gas producer, Chesapeake. CEO Aubrey McClendon looks to be "in hot water", says Sam Gustin on Time.com. The Securities and Exchange Commission has launched an "informal" investigation amid revelations of an undisclosed billion-dollar personal loan, secured against his stakes in wells operated by the firm (itself carrying debts of over $12bn).

Now we learn that McClendon also ran a $200m hedge fund trading oil and gas on the side. No wonder there are calls from the Senate for the Justice Department to investigate Chesapeake for potential "fraud, price manipulation,conflicts of interest, or other illegal activities".The firm's shares, meanwhile, have tanked.