The world’s greatest investors: John Arnold

John Arnold was born in Dallas, Texas in 1974. He completed a degree in mathematics and economics from Vanderbilt University, while running his own firm that specialised in taking advantages of price differences in collectable hockey cards between Texas and New York. He then joined energy company Enron as an analyst, but quickly became a derivative trader in its natural-gas division. After Enron went bankrupt in 2002, he started his own hedge fund, Centaurus Advisors. He retired in May 2012 because he felt that regulation and the rise of shale gas reduced the opportunities.

What was his strategy?

Arnold’s strategy at Enron was to use his knowledge of his own company’s operations to trade natural-gas derivatives. But shortly after he struck out on his own, he discovered that energy firms were now required to publicly disclose data online about their operations to make the market more transparent. He used this data – of which other traders were seemingly unaware – to produce better models of supply and demand, and to decide when natural gas was cheap or expensive.

Did this work?

During Arnold’s time at Enron he reportedly made $750m in legitimate profits at a time when the company’s core business was making a loss. Indeed, Enron’s management were so desperate to keep him that they gave him a bonus of $8m only days before the firm filed for bankruptcy. Centaurus made more than 50% a year in each of its first seven years, and by 2009 it was managing $5bn in assets. It made its first loss in 2010, but bounced back to profit in 2011. Today, Arnold’s personal fortune is estimated at $2.9bn.

What were his biggest successes?

In 2006, Arnold was one of the traders on the other side of a huge gas trade placed by Amaranth, a rival hedge fund. Amaranth bet that prices would continue to rise, but Arnold felt that they would fall as the autumn approached and the need for air conditioning waned. Amaranth had bet so heavily on rising prices, controlling 70% of the market, that it was vulnerable to even a small fall. While it collapsed, the profits from the trade enabled Centaurus to make net returns of 317% that year.

What lessons are there for investors?

Arnold’s success shows the importance of in-depth research, while Amaranth’s demise shows the perils of putting too much of your capital into one trade. Arnold’s decision to retire is a wise example of quitting when you no longer have an edge.