John Arnold, Hedge-fund Legend, 35 year old Billionaire
Some noteworthy quotes from a Fortune article:
His Houston-based hedge fund, Centaurus Energy, which manages more than $5 billion in assets, has never returned less than 50% in seven years of business.
Arnold has the brain of an economist, the experience of a veteran gas man, and the iron stomach of a riverboat gambler.
Arnold’s early trading experience, which gave him insight into the needs of gas customers all over the country, lent him an edge once virtual trading took off.
“He’s like a poker player who can see everyone else’s cards,” says a longtime trader who has known Arnold since his Enron days.
Arnold, an intense worker with a wide network of contacts, aims to win by understanding the fundamentals of the gas market better than anyone else.
“I try to buy things whenever they’re trading below what [our] analysis shows to be fair value and sell things whenever our analysis shows that the forward curve is higher than our analysis of fair value.”
Arnold combines that knowledge with a willingness to make giant moves. Indeed, Centaurus earns the lion’s share of its profits on a small number of enormous trades. “He only really puts on a trade of substance once or twice a year,” says a person familiar with the fund. “But when he goes for it, he’s so big he makes a fortune each time.”
Arnold’s ability to make megabets is helped by the fact that the fund has been closed to new investors since 2005. He has repaid nearly all his investors and now invests only his and his employees’ capital, with none of the strings that come attached to other people’s money.“He and those lucky enough to be in his inner circle have a huge edge in that they can do whatever they want,” says a commodities fund placement adviser.
Traders familiar with Arnold’s style also credit a calm and disciplined manner that helps him stay eerily focused on the fundamentals of the market when other trades are creating distractions.
The price was “still a long way from fundamental value,” Arnold argued. In fact, he had separately been buying contracts that would pay off if prices tumbled even further — and he was dead right. Arnold’s timing was “remarkably accurate,” according to the Senate report. Centaurus went on to 200% gains that fall, while Amaranth was forced to liquidate.
Centaurus’s trading in those months netted nearly $1 billion. The result was a reported 317% return overall for Centaurus in 2006, a year when another natural-gas fund, MotherRock, also imploded trying to sustain a losing bet.
While others had panicked, Arnold had remained patient, waited until the right moment, and then opportunistically relieved others of their money. The best compliment may have come from a competitor who once described Arnold and his trading team to reporters as “like being on the Yankees, and he’s Babe Ruth.”
He attended Vanderbilt University, where professors remember him as an economics whiz, able not only to understand concepts instantly but also to do complex math in his head.
On Enron’s natural-gas trading desk, which handled contracts totaling more than $1 billion a day, when he was only in his mid-twenties, Arnold alone reportedly earned Enron nearly $750 million in 2001. One colleague dubbed him the “king of natural gas.”