January 10, 2012 / 5:50 PM / 7 years ago

Exclusive: Hedge fund Velite nabs natgas crown from Arnold

NEW YORK/HOUSTON (Reuters) - Move over, John Arnold: the U.S. natural gas market has a new hedge-fund king, operating as skillfully and mysteriously as the ex-Enron wunderkind who once wowed the trade.

Energy trader David Coolidge sits in his office in Houston January 6, 2012. For three years in a row, Houston-based Coolidge has trounced most of his rivals, making Velite Capital one of the best performers in U.S. energy markets that have vexed veterans and handed humbling losses to some of the savviest traders. A former walk-on Texas A&M defensive back who cut his teeth trading for legendary oilman Oscar Wyatt, Coolidge is quietly stealing the thunder of better-known Houstonian Arnold, who has struggled to regain his winning ways for two years running. REUTERS/Richard Carson

For three years in a row, Houston-based David Coolidge has trounced most of his rivals, making Velite Capital one of the best performers in U.S. energy markets that have vexed veterans and handed humbling losses to some of the savviest traders.

A former walk-on Texas A&M defensive back who cut his teeth trading for legendary oilman Oscar Wyatt’s Coastal Corp, Coolidge is quietly stealing the thunder of better-known Houstonian Arnold, who has struggled to regain his winning ways for two years running.

The $1.4 billion Velite, named after a type of Roman infantryman who often carried little more than a javelin, returned 51 percent last year, according to an investor in the fund. Gains accelerated in December as natural gas prices extended a six-month slump to drop below $3 per million British thermal units for the first time in more than two years.

That would rank it one of the year’s best-performing commodity funds, according to hedge-fund database BarclayHedge, which doesn’t include Velite in its tracking.

Arnold’s Centaurus Energy returned less than 10 percent last year, after suffering its first-ever loss - nearly 4 percent - in 2010, said the source, who invests in both funds.

At $4 billion, Centaurus remains by far the biggest and most successful natural gas-oriented fund, but Arnold has found himself hemmed in by diminishing market volatility and tough new limits on commodity speculators. Last year, as he turned 37, Arnold decided his fund had grown too large, and told investors he was returning about $1 billion of their capital.

Coolidge, who becomes 47 this June, has continued to thrive, often while gas prices tumbled. Vast new reserves of shale gas have turned the U.S. market on its head in the past few years, promising a long-lasting supply surplus that has cratered prices and tempered the volatility on which many traders prosper.

Velite gained 33 percent in its 2006 debut as U.S. benchmark Henry Hub gas prices fell 44 percent; in 2009, it jumped 72 percent as prices tested new lows. His weakest year was 2010, yet Velite still eked out a gain of more than 2 percent.

“Velite has usually been the more aggressive of the natgas funds, with attendant greater volatility,” said Michael Hennessy, managing director at Morgan Creek Capital Management, a $9 billion fund-of-funds in Chapel Hill, North Carolina, who invests in Velite but declined to discuss its performance.

“It’s a strategy that has worked very well.”

Coolidge declined to discuss with Reuters the specifics of his fund, his outlook or operations, but after multiple requests agreed to talk about his career and influences in the first major interview of a more than two-decade-long work history.

The Centaurus office did not respond to telephone calls and emails from Reuters seeking comment for this story.


While Arnold got his start as a whiz-kid gas trader at ill-fated Enron Corp in the late 1990s, Coolidge launched his career a decade earlier, working his way from a small energy company through Houston powerhouses Coastal and Reliant Energy.

After earning a degree in industrial distribution from Texas A&M in 1988 and a stint at a Californian aerospace firm, Coolidge returned to Texas to reunite with his girlfriend, now his wife of almost 20 years. Within a year he was working for gas firm Seagull Energy, now part of Devon Energy (DVN.N).

“The deregulation of the pipelines happened prior to ‘89, and that’s why a lot of people were hiring,” Coolidge told Reuters during the interview at his modest offices in Houston’s upscale Post Oak neighborhood.

“I got in the energy business because I heard it was a good opportunity. You could get a job and hopefully pay some bills and do some fun things. But it wasn’t as if: hey, I was going to be a trader.”

By 1990 he moved to Coastal, the energy giant created by fellow A&M alumnus Wyatt. An early pioneer of the U.S. gas market, Wyatt had begun decades earlier building a vast network of pipelines to break the deadlock of the industry’s giants and earned the company a reputation for savvy, aggressive trading.

“They were kind of the Oakland Raiders of trading. Just win, baby,” Coolidge said.

Coolidge initially chafed at being assigned to the smaller Rockies/West Coast gas trading team rather than sticking with the unit covering the benchmark Henry Hub, Louisiana, market. He later rose to lead his desk.

In 1995, Coolidge left Coastal with two colleagues - Craig Elias and Brian Redd, formative figures for him - to join another trading firm that ultimately became part of Reliant, the former Houston utility that was aggressively expanding its trading division in the mold of crosstown rival Enron.

As vice president for gas trading, Coolidge impressed colleagues with an apparent ability to remain cool under pressure - a valuable asset in natural gas, arguably the world’s most volatile commodity market.

“I worked with him when we had the big spikes and big drops,” said Aaron Studwell, a meteorologist employed by Reliant between 1997 and 2000.

“He was always very steady. He’s tough. His highs weren’t that high, his lows weren’t that low. If he had a bad day, he knew he was going to get out of it. I’ve seen traders let emotion get the better of them - he was never like that.”

After leaving Reliant in 1999, Coolidge joined AAA Capital, an affiliate of Citigroup (C.N), where he was a principal gas trader managing Citi’s retail energy funds. He left in 2006 to launch Velite, taking up office space one floor above AAA.

“What makes Coolidge a very good trader is that it’s not just one home run, it’s not just one event. It’s consistency over the long term, identifying market mispricings,” said Kyle Cooper, who was one of Coolidge’s first hires and worked at the fund as its lead analyst until January 2010.

“For a sports analogy, he consistently hits singles and doubles. He’s not just swinging for the fences,” said Cooper, now director of research at Cypress Energy Capital Management.


As Arnold’s wealth expanded, he began to lower the veil of secrecy that had shrouded his success. He appeared before Congress in 2009 to advocate against new regulations; in 2010, he pledged to give away at least half of his wealth to charity under a campaign led by Warren Buffett and Bill Gates.

Coolidge - until now - has kept himself and his fund far from the headlines, just the way he prefers.

“If we’re mentioned prominently, we’re probably going to get calls. And if we get calls, they’re just distractions, and we just don’t need them. We’ve actually done a pretty good job of staying focused,” Coolidge said.

Velite has only 14 employees, about half of whom are traders. Their trading room, neatly kept, has a dozen or so computer stations arrayed in rows with an oversized monitor on one wall. Dress is casual and family often comes first - one afternoon last week Coolidge had ducked out to pick up one of his four children from basketball practice.

Coolidge is quick to share credit with his team: “I don’t think I’m the best trader here. I’ll put it that way.”


Velite’s waiting-room yields one sign of an abiding passion for Coolidge: the Texas A&M American football team known as the “Aggies”, a source of deep pride for a storied school that has grown from an agricultural and mechanical college into a major university. Alums include Texas Governor Rick Perry, singer Lyle Lovett and the current CEO of state oil firm Saudi Aramco.

At A&M, Coolidge joined the 12th Man Kickoff Team, set up to give non-scholarship athletes a better chance of playing for the college and to boost fan enthusiasm for the football program.

“(They were) crazy Aggies that were going to run down there and tackle the other team, that’s all they did,” said Brad Marquardt, spokesman for A&M’s football program.

In 2007 Coolidge donated a seven-figure sum to an A&M scholarship fund, and a football practice area was named for him and his wife.

A signed copy of former coach Jackie Sherrill’s book on the 12th Man Team rests on a side table in the Velite waiting-room, inscribed with the words “Gig ‘em”, a traditional Aggie cheer.

“It was great to be part of that. I remember getting smashed. I had a few tackles. Nothing to write home about. It was a thrill, there’s no question,” Coolidge says.


While the correlation between Velite’s performance and the gas market suggests Coolidge has been on the right side of almost every price collapse, those familiar with the vagaries of NYMEX gas say he probably had put on different combinations of energy futures and options to get such blockbuster returns.

The past year was tough for energy funds, with crude oil showing unusual choppiness: a strong first half, a weak third quarter and sharp swings over the last three months.

In natural gas, declining volatility was a bigger problem, with fewer of the stomach-churning rides of the past years that had allowed players such as Arnold to thrive.

“What we’ve had in the last six months is a big pull-back from the speculators and hedge funds from playing the market,” said Mike Guido, director of hedge-fund sales at Macquarie Bank in New York.

“They don’t see the risk/reward of establishing a very large short position. Neither is there anything fundamentally exciting to bet on higher prices,” Guido said.

The average energy hedge fund fell about 0.6 percent in the first 11 months of last year while the average commodity fund lost nearly 6 percent, according to Chicago-based Hedge Fund Research.

The roughly $2 trillion hedge-fund universe, as a whole, dropped 5.3 percent in 2011, database BarclayHedge said.

While Coolidge has made his mark with profitable consistency, Arnold took the highway to bold gambits.

He entered the history books in 2006 when Centaurus gained more than 300 percent by taking bets opposite to those held by Amaranth Advisors - the natural-gas fund that spectacularly imploded with a $6 billion loss.

“He did an awesome job,” Coolidge said of Arnold. “He’s an awesome trader and a good friend and a great guy.”

Arnold’s compound annual return of about 130 percent since 2002 remains an enviable record. However, after the 2008 financial crisis, trading restrictions imposed by the Commodity Futures Trading Commission crimped his style and Centaurus has been fined for violating position limits on NYMEX natural gas.

Energy trader David Coolidge is seen in his office in Houston January 6, 2012. REUTERS/Richard Carson

At the same time, the calming of whipsaw volatility in natural gas prices has flummoxed many traders. In a market accustomed to daily swings of more than 5 percent, it exceeded that mark only six times last year as the surge in shale-gas production filled storage caverns and flattened prices.

Coolidge takes it in stride.

“It’s just a matter of not getting complacent with the old trades that made money because the market’s going to continue to evolve,” he said. “The market’s going to beat you so you’ve got to have a short memory. You’ve got to have a lot of confidence. You’ve got to separate your ego from your book.”

Additional reporting by Matthew Robinson in New York and Kristen Hays in Houston; Editing by Jonathan Leff and Dale Hudson

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