Well no. Both guys were running multi-billion dollar funds. They were not using credit. This trade was going back and forth. Some bad luck hit Hunter when just as the trade was starting to work for him, he got hit with whatever that massive hurricane was in 2007. HJ exploded and Arnold pounced. This trade was slightly similar in a way to the Nick Leeson short Nikkei trade. Leeson was massively short and looked like he might catch a break with the market stabilizing. Partially due to his index buying. Then of course we had the massive earthquake that hit the area and the market went limit down. I guess one of the themes here is all traders have good and bad luck. The idea is to make sure when the back luck comes, it doesn't take you down. With LTCM it was the Russian default on their debt. These big traders really underestimate their ability to ride out the periods where bad luck happens and yes, leverage is a big part of that. In the case of Hunter he had actually reduced his position and his overnight margin was within acceptable boundaries. The hurricane exploded that spread though. And Arnold knew he could squeeze him.
As a survivor of a few Wall Street firms where “go big” was the culture, in the end it’s about ego more than anything else. Technical aspect aside, all of these guys had one thing in common “we know better and we are never wrong”. When you think this way, any size is OK. Sometimes these people win (and in process make themselves rich and successful) and sometimes they blow up big. Yet another way to socialize the losses and privatize the gains
Assuming you're unmarried and willing to trade this intra-market Mar/Apr NG spread, how would you hedge against an adverse move? Options?
Sounds like it was mostly luck. Hunter suffered bad luck through an unexpected Hurricane. Arnold went in for the kill when the enemy is down.
It wasn't a hurricane but a mild winter in 06'...Hunter bet it was going to rise, Arnold bet Nat Gas would fall, Hunter had a $3B margin call at one point and rest is history(http://archive.fortune.com/2009/11/23/news/companies/centaurus_john_arnold.fortune/index.htm). They did make small potatoes from hurricane season in 05' though. The legend himself said on CNBC, last week, when being interviewed with Tilman Fertitta, that Nat Gas trade is unlikely to happen again as it is a completely different market.