Hedge Hogs (eBook)

Dreyfuss / HEDGE HOGS

1

Going All In

Day after day and month after month during the spring and summer of 2006, a brash young commodity trader named Brian Hunter invested hundreds of millions of his clients' dollars--money that not all of them could afford to lose--in high-risk bets on the price of natural gas.

Every day Hunter, tall and athletic, sat facing a bank of flickering monitors. Over and over again he'd juggled the complicated mathematical formulas in his head, called on his trading associates, and consulted the charts, graphs, and weather forecasts that filled the screens in front of him, calculating the odds. An unexpected cold winter that would cause a spike in gas prices? It had seemed likely. Stronger than expected demand, at least stronger than other traders were counting on? He thought it possible. A hurricane-induced supply disruption? There was a good chance.

So he'd bet big. Throughout the year, he'd singlehandedly dominated the trading of natural gas. At times he'd held 50 percent or more of all the contracts for the huge natural gas market in the months ahead, betting that winter prices would rise.

But speculating on natural gas prices was risky business, and by August Brian Hunter knew he was in trouble. And billions of dollars of other people's money were on the line.

Although it was still hot and sticky in Connecticut, where his firm was headquartered, Hunter was feverishly thinking ahead to the first chill of winter, when he had expected demand for gas to pick up, sparking price hikes and letting him make a killing.

He'd already spent large sums propping up his positions while waiting for something, anything--a hurricane, a pipeline disruption, a delivery bottleneck--that would push winter prices up. But there had been nothing. Indeed, if anything caused prices of gas contracts to go his way at times, it was likely Hunter's own trading. So powerful was he that he'd created his own wave, all by himself. Now what?

Lots of other people smelled the scent of gas in the air and feared an explosion. The executives at his hedge fund, Amaranth, were getting worried, since too much of the company's assets were tangled up in Hunter's precarious portfolio. They were pressing him to unload a big chunk of his holdings. Usually Hunter and the handful of traders he oversaw operated out of an office in Calgary, Alberta. But for several months, wary Amaranth executives repeatedly ordered Hunter and his team of traders to fly east to Greenwich, Connecticut, so that they could more easily scrutinize their trading.

Brokers at J. P. Morgan, which handled Hunter's trades and collected the collateral he needed for them, were alarmed at the size of his holdings too. Already in mid-August they'd demanded that his firm post as much as $2 billion to guarantee his bets.

And down at the New York Mercantile Exchange (NYMEX) they could smell gas too. The officials at the world's largest energy commodity exchange, not unused to watching high-stakes gambles unfold, warned Hunter to cut back.

Although he didn't know it at the time, Hunter had yet another problem. About fifteen hundred miles away to the southwest, his main rival, John Arnold, didn't see things the way Hunter did. And he was ready to pounce.

Arnold was widely considered the top energy trader in the world. A wily Enron veteran, Arnold was exactly the same age as Hunter, but perhaps a bit more experienced in the high-stakes energy trading game. He too ran and reran the numbers and analyzed the fundamentals of the natural gas market, and he didn't believe that gas prices were likely to rise...