* Famed 38-year-old trader to focus on philanthropy
* Arnold most generous giver since billionaire George Soros
* Shuts down energy fund as natural gas volatility softened
By Kristen Hays and Jeanine Prezioso
HOUSTON/NEW YORK, May 3 To the list of
unexpected windfalls created by the boom in shale gas
production, add one more: The full-time philanthropy of
billionaire trader John Arnold.
Tired of struggling to eke out gains in a natural gas market
that has been deluged by an unyielding surplus of supply, Arnold
announced on Wednesday that he would wind down his Centaurus
hedge fund after a decade of unparalleled returns. The fund was
flat this year through March, according to an industry source.
In one way, the hydraulic fracturing technology used to tap
into decades' worth of cheap domestic gas has cut short the
career of the legendary trader, one who before the age of 40
amassed a fortune of more than $3 billion in the wildest
That volatility has been flattened by a glut of natural gas
thanks to technological advances that allow much more to be
produced from hard shale rock than ever before.
But there's a flip side: Arnold, the biggest
financier-turned-giver since George Soros, will now fully focus
his sharp wits and financial savvy on vexing issues ranging from
pension reform to public schools, directing the $700 million
foundation he founded with his wife Laura in 2008.
The couple -- widely respected in their home town of
Houston, which still lives under the shadow of Arnold's
erstwhile employer Enron -- expects to see results.
"They make a distinction between charity and philanthropy,"
says Jim Crownover, chairman of Rice University's board of
trustees, on which Laura Arnold serves. John Arnold also serves
on the board of the Rice Management Company, which oversees the
university's $4.5 billion endowment.
"They think investment vs. donation," he said. "They're
looking at places where the market doesn't work, like in
The Arnolds were No. 11 on the Chronicle of Philanthropy's
list of the 50 most generous U.S. donors of 2011 with $101
million. Arnold turned 38 in March making him the youngest among
the top givers -- by more than two decades in most cases.
"We have the benefit of being young, so we can look at very
complicated problems," Arnold told the Chronicle last year in a
rare interview. "We have years to see these through."
Another major cause is the Innocence Project, founded 20
years ago, which works to exonerate wrongfully convicted people
and institute other criminal justice reforms.
The Arnolds funded a study of eyewitness identification that
the Texas Legislature is using as the basis for producing a
unified standard for eyewitness IDs throughout the state.
The study would have faltered without their backing, says
Barry Scheck, who co-founded the project.
"They came through in a big way," he said. "But they don't
just give you money... They really want to know what you're
Arnold declined requests this week to talk about his
retirement or future plans.
Many gas traders rued the news, a stark sign that a period
of extraordinary volatility had truly ended.
"Our market's loss is going to be humanity's gain," says
Javier Loya, chairman and CEO of broker OTC Global Holdings in
Houston, who has brokered trades for Arnold for 17 years. Like
others interviewed for this story, Loya described Arnold as
super-competitive, but also humble and forgiving.
In the previous decade, natural gas prices fluctuated by
more than 5 percent once every 7 days, according to Reuters
data, making it the most volatile commodity in the world.
But since the start of 2010, fluctuations of that scale have
occurred only once ever 17 trading days, giving dealers who
thrived in that kind of volatility fewer opportunities.
Last year, after registering the first ever annual loss in
2010, he returned $1 billion of the fund to investors. That left
around $4 billion, about half of which was outside funds, one
"It reached a point where you had to be a childhood friend
to get money to him," John Kilduff, Partner, Again Capital LLC.
"He just didn't have any more capacity."
After graduating from Vanderbilt University with an
economics and math degree in 1995, Arnold joined Enron in its
heyday, quickly rising to become one of their most profitable
traders ever. He used his earnings, one year is said to have
included a record $8 million bonus, to set up Centaurus in 2002.
He made his early mark principally trading derivatives.
In the most famous example, he stood his ground against
Connecticut-based Amaranth Advisors in 2006, taking the other
side of a bet in the famous "widowmaker" spread in the natural
gas market-- the difference between March and April prices.
Amaranth's Brian Hunter lost, and the fund imploded with a $6
Arnold benefitted from Hunter's outsized bets in the market
but he didn't break any laws. By taking the other side of that
bet, he swam through a loophole in commodities trading laws. The
so-called Enron loophole that allowed traders to go unregulated
and gather large positions and not report them to a regulator.
In July 2007, the commission forced the
IntercontinentalExchange to report individual trader positions
to U.S. regulators, something it didn't have to do before. In
June 2009, the New York Mercantile Exchange changed its laws to
put hard position limits on major natural gas contracts.
Arnold pleaded with the Commodity Futures Trading Commission
to not force position limits in a 2009 written statement.
"This requirement will result in a significant amount of
unnecessary trading and more volatility as traders have to
unwind previously existing positions," he wrote. But in this
battle he did not prevail. Last year, the CFTC went ahead and
imposed measures to limit speculation in commodities,
effectively clipping the wings of big traders like Arnold.
The Centaurus legacy seems unlikely to fade. One senior
commodity market source said some staff had been surprised by
Arnold's abrupt retirement, but would likely quickly find
employment, possibly among the foreign firms eager to siphon off
any of his team's crack trading talent.
One rare Centaurus departure was Mike Maggi, Arnold's deputy
and former Enron colleague, who retired a few years after the
Ameranth saga. But retirement didn't suit him, and he launched
his own fund Goldfinch Capital.
After a 20 percent gain in 2011, a year in which many hedge
funds struggled to break even, Goldfinch is up 13 percent so far
this year, a respectable performance but not the benchmark,
according to an industry source who tracks performance.
Among the narrow circle of Houston-based energy hedge funds,
generally described as a more down-to-earth lot than rivals in
Connecticut, London or Geneva, that honor falls to Velite
founder David Coolidge at the moment. His fund is up 22 percent
this year, extending a winning streak from shorting gas.
Whether someone as passionate about the market as Arnold can
stay out of the game after 17 years remains to be seen.
"If he approaches the problem of distributing his wealth as
efficiently as he approached the natural gas options market,
he's going to do great things for the world," said John
D'Agostino, who worked for rival gas-focused hedge fund
MotherRock a decade ago. "There are other guys who are going to
figure out how to make money in the gas market."