By Barani Krishnan
NEW YORK, Dec 14 (Reuters) - Centaurus Energy, the natural gas-focused hedge fund of billionaire trader John Arnold, may be set for its first annual loss, possibly because of reduced trading ahead of a crack-down on commodity speculation.
Houston, Texas-based Centaurus is down almost 3 percent through October this year, an investor in the $5 billion fund told Reuters on Tuesday. Centaurus gained nearly 30 percent in 2009, a year when gas prices hit a seven-year low.
The revelation comes just two days before the Commodity Futures Trading Commission puts forward a proposal to limit the number of positions any single trader can hold in futures and swaps markets, its most aggressive move to date to control the impact of financial speculators in commodity markets.
The threat of tougher curbs may be crimping the style of a manager famed for big bets, such as in 2006, when Centaurus nearly trebled in value after taking the opposite side of Ameranth Advisors' ill-fated position that lost it $6 billion.
'People of Arnold's size are hampered in natgas because of the CFTC's limits,' said the long-time investor of Centaurus, who asked not to be identified because the fund's performance is supposed to be confidential.
'Arnold's made a lot of money but he's also in a different stage in his career than he was five years ago,' the investor said.
Centaurus declined to comment.
Since its launch in 2002 with a big paycheck Arnold got from Enron, his previous employer, Centaurus has yet to lose money in a full year, staying profitable through the financial crisis and beating almost every rival in its class. That's made Arnold, 36, one of America's youngest billionaires.
Some industry officials say it's been a tough year for many funds, with volatility diminishing and prices trading narrowly around $4 per million British thermal units (mmBtu).
'In general, it's been a difficult market,' said Fraser McKenzie, head of research at 47 Degrees North Capital Management in Pfaeffikon, Switzerland, which has about about $300 million invested in hedge funds.
'There hasn't been a lot of clear trends. Guys with good risk management are getting stopped out of positions. Those staying in positions are showing very high levels of volatility. It's been as tough a market as it can be.'
But Mike Hennessy, managing director at Morgan Creek Capital Management, a $10 billion fund-of-funds in Chapel Hill, North Carolina, concurred that looming limits could have hurt.
'I think John Arnold's constrained somewhat by all these regulatory moves, as most of the big guys are,' said Hennessy, who is not an investor in Centaurus but is familiar with the issues faced by many commodity funds.
Institutional Investor, which first reported the fund's losses, said Centaurus was down 2.7 percent through October despite rising 7.9 percent that month alone.
OPPOSED FINANCIAL LIMITS
Arnold, who has shunned the spotlight through most of his success, emerged to testify before the CFTC last year, asking that the regulator suspend position limits imposed by the New York Mercantile Exchange on financially settled gas futures.
'We believe that position limits on financial contracts will decrease liquidity, increase transaction costs and increase volatility associated with expiration -- all without achieving any of the reforms that the commission seeks,' Arnold said. He asked instead for 'hard limits on physically deliverable contracts.'
The move toward tougher limits -- beyond the less rigid 'accountability limits' the the exchanges themselves use to maintain orderly markets -- has been underway for several years.
The CFTC proposed limits for energy markets in January, but has revised those now that its authority also extends to the vast swaps market, a huge part of natural gas trade.
The natural gas market was once the domain of big traders who relished the whipsaw volatility, often taking large positions on seasonal spreads that could pay off big -- or, in the case of Amaranth, lose big.
Some traders said that Centaurus may have lost money on a bearish bet on the infamous October/January spread in U.S. natural gas futures, which was said to have weighed on a lot of other portfolios this year.
The spread is a bet that gas prices will drop in October -- when demand for heating is tepid just before the winter -- and rise in January, when the weather turns much colder.
This year in particular, the market was expecting storage of natural gas to fill to record levels or more ahead of the winter. But record-hot summer temperatures in the United States ate up more gas than some anticipated and prices rose, tripping up funds that had bet on the market to drop.
Arnold was estimated to be worth $2.7 billion by Forbes magazine when he turned 35 last year, making him one of America's youngest billionaires. He has also made news for philanthropy, agreeing to give away half of his money in his lifetime, joining Warren Buffet and Bill Gates.
(Additional reporting by Jeanine Prezioso; Editing by Jonathan Leff) Keywords: ENERGY HEDGEFUND/CENTAURUS (barani.krishnan@thomsonreuters.com; nyc.commods.newsroom@thomsonreuters.com; 1 646 223 6040) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, Dec 14 (Reuters) - Centaurus Energy, the natural gas-focused hedge fund of billionaire trader John Arnold, may be set for its first annual loss, possibly because of reduced trading ahead of a crack-down on commodity speculation.
Houston, Texas-based Centaurus is down almost 3 percent through October this year, an investor in the $5 billion fund told Reuters on Tuesday. Centaurus gained nearly 30 percent in 2009, a year when gas prices hit a seven-year low.
The revelation comes just two days before the Commodity Futures Trading Commission puts forward a proposal to limit the number of positions any single trader can hold in futures and swaps markets, its most aggressive move to date to control the impact of financial speculators in commodity markets.
The threat of tougher curbs may be crimping the style of a manager famed for big bets, such as in 2006, when Centaurus nearly trebled in value after taking the opposite side of Ameranth Advisors' ill-fated position that lost it $6 billion.
'People of Arnold's size are hampered in natgas because of the CFTC's limits,' said the long-time investor of Centaurus, who asked not to be identified because the fund's performance is supposed to be confidential.
'Arnold's made a lot of money but he's also in a different stage in his career than he was five years ago,' the investor said.
Centaurus declined to comment.
Since its launch in 2002 with a big paycheck Arnold got from Enron, his previous employer, Centaurus has yet to lose money in a full year, staying profitable through the financial crisis and beating almost every rival in its class. That's made Arnold, 36, one of America's youngest billionaires.
Some industry officials say it's been a tough year for many funds, with volatility diminishing and prices trading narrowly around $4 per million British thermal units (mmBtu).
'In general, it's been a difficult market,' said Fraser McKenzie, head of research at 47 Degrees North Capital Management in Pfaeffikon, Switzerland, which has about about $300 million invested in hedge funds.
'There hasn't been a lot of clear trends. Guys with good risk management are getting stopped out of positions. Those staying in positions are showing very high levels of volatility. It's been as tough a market as it can be.'
But Mike Hennessy, managing director at Morgan Creek Capital Management, a $10 billion fund-of-funds in Chapel Hill, North Carolina, concurred that looming limits could have hurt.
'I think John Arnold's constrained somewhat by all these regulatory moves, as most of the big guys are,' said Hennessy, who is not an investor in Centaurus but is familiar with the issues faced by many commodity funds.
Institutional Investor, which first reported the fund's losses, said Centaurus was down 2.7 percent through October despite rising 7.9 percent that month alone.
OPPOSED FINANCIAL LIMITS
Arnold, who has shunned the spotlight through most of his success, emerged to testify before the CFTC last year, asking that the regulator suspend position limits imposed by the New York Mercantile Exchange on financially settled gas futures.
'We believe that position limits on financial contracts will decrease liquidity, increase transaction costs and increase volatility associated with expiration -- all without achieving any of the reforms that the commission seeks,' Arnold said. He asked instead for 'hard limits on physically deliverable contracts.'
The move toward tougher limits -- beyond the less rigid 'accountability limits' the the exchanges themselves use to maintain orderly markets -- has been underway for several years.
The CFTC proposed limits for energy markets in January, but has revised those now that its authority also extends to the vast swaps market, a huge part of natural gas trade.
The natural gas market was once the domain of big traders who relished the whipsaw volatility, often taking large positions on seasonal spreads that could pay off big -- or, in the case of Amaranth, lose big.
Some traders said that Centaurus may have lost money on a bearish bet on the infamous October/January spread in U.S. natural gas futures, which was said to have weighed on a lot of other portfolios this year.
The spread is a bet that gas prices will drop in October -- when demand for heating is tepid just before the winter -- and rise in January, when the weather turns much colder.
This year in particular, the market was expecting storage of natural gas to fill to record levels or more ahead of the winter. But record-hot summer temperatures in the United States ate up more gas than some anticipated and prices rose, tripping up funds that had bet on the market to drop.
Arnold was estimated to be worth $2.7 billion by Forbes magazine when he turned 35 last year, making him one of America's youngest billionaires. He has also made news for philanthropy, agreeing to give away half of his money in his lifetime, joining Warren Buffet and Bill Gates.
(Additional reporting by Jeanine Prezioso; Editing by Jonathan Leff) Keywords: ENERGY HEDGEFUND/CENTAURUS (barani.krishnan@thomsonreuters.com; nyc.commods.newsroom@thomsonreuters.com; 1 646 223 6040) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.