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Commentary

John Arnold Shuts His Centaurus Energy Fund

Legendary fund manager John Arnold told investors that he was closing the Centaurus Energy fund, to pursue other interests. Arnold was one of the "good" guys in Enron, making around $750 million in profits for Enron the year that it died from upper management fraud, and got a (tiny) $8 million as a bonus.

Arnold went on to start Centaurus, and made more than 100% for a significant part of its existence, and more than 50% in each of the first seven years. In 2006, when it made 300%, it took on the giant Amaranth on a bet on natural gas markets (Arnold was short) and made $1 billion.

The last three years have been tough, though. The fund saw its first loss in 2010. (According to one source, just 4%) 2011 saw a sub-10% return, and supposedly in 2012, the fund is up just 3-4% (hearsay) till May.

Zerohedge says it’s probably the new commodity player limits (which restrict the size of each player in a market) and the fact that people are getting into energy futures as a way to protect wealth that promotes the natural player’s exit. It’s that time when demand and supply matter less than the fact that some central bank is doing a quantitative easing and so people rush to buy energy and gold to save their money from the debasement of currency. So you could wager that it’s going to be a warm winter and people need less gas, but one Fed statement will take prices up. Much of the game in energy or commodity futures is based on small moves that give outsized return through the use of insane leverage (some positions can be levered 30-40x). So a sudden rush of money in or out of a commodity can make sudden, large jumps unconnected with fundamentals, and thus destroy the old-trader-with-lots-of-leverage. But there’s no pitying anyone – Arnold played his game and left it when he could no longer be king.

Also to those saying trading is a bad thing and trying to use Arnold’s exit as an example: his net return to investors over 10 years is probably over 40% CAGR. The last three years have been bad but nothing spectacularly low – they would have gained. And of course, a good thing about the trading business is that you can’t be wedded to a trade, so you can quit whenever you like and keep the money.

But it goes to say: today, the micro-strategies don’t matter. Fundamentals don’t matter. The Macro picture trumps the micro. You have to keep one eye on Greece, another on the Fed, and find other eyes for all those big things that might just happen, and react accordingly. The risk is leveraged trading has gone through the roof.