Content area
Full Text
Note: The Enron trader turned hedge fund billionaire lost money last year. Can his effort to turn Centaurus into a mini-Enron revive his fortunes?
By Leah McGrath Goodman
Illustration by Andrew Clark
It is one minute before the market's close in the final days of John Arnold's first down year. The door is open to Arnold's corner suite in the Houston office of Centaurus Advisors, and the nation's youngest hedge fund billionaire is brooding. Hunched over a desk scattered with papers, he sits motionless, hair tousled, shirt rumpled, no tie. The celebrated energy trader has a lot on his mind: a coal company that's turned into a money pit, his firm's third trading violation in two years, the $725 million sale of a Texas gas hub--and a futile last-ditch attempt to plug a hole in his $5 billion portfolio.
Since Arnold launched Centaurus out of the ashes of Enron in 2002, he has boasted an unheard-of compound annual growth rate of about 125%, prompting many of his investors to assume he would forever rake in outlandish returns. Yet 2010 proved to be the 37-year-old's first grand reckoning, as sweeping structural changes in the market forced him to accelerate his shift away from trading into buying real assets--a vertical integration model that appears to be an attempt to create a mini-Enron.
Arnold has little choice but to try. Last year, breakthrough gas-drilling technology flooded the marketplace with excess supply, knocking the froth out of prices and undercutting the depth, volatility and profit profile of the natural gas market, Arnold's primary hunting ground. On top of that, new trading rules clipped the wings of speculative heavyweights like Arnold, limiting the size of the bets the former Enron trader can take in a market that has traditionally fed his fund's formidable bottom line. The result: Arnold was forced into 11th-hour asset sales to patch up the losses in his portfolio, which still shed nearly 4% of its value on the year.
While the stumble proves even Arnold cannot always beat the market, people close to Centaurus say it was not him but one of his traders who drove returns into the red with a bullish natural gas bet that dragged down the fund's performance. At the end...