HOUSTON/NEW YORK (Reuters) - 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 commodity ever.
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 education.”
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 doing.”
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 every 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 investor estimated.
“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 billion loss.
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.”
Additional reporting by Barani Krishnan, Edward McAllister, Eileen Houlihan and Jonathan Leff; Editing by Bob Burgdorfer