Trader Hits Jackpot in Oil, As Commodity Boom Roars On

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Trader Hits Jackpot in Oil,
As Commodity Boom Roars On

WESTPORT, Conn. -- The commodities market's historic surge is generating huge paydays on Wall Street. One of the biggest beneficiaries has been Andrew J. Hall, an enigmatic British-born trader who, five years ago, anticipated an important shift in the way the world valued oil -- and bet big.

ART AND BUSINESS

Mr. Hall's castle in Germany¹ has art exhibitions, for viewing by invitation only.

Plus, listen to a podcast² from Global Currents with Mr. Hall on the oil markets in 2006.

Over the past five years, Mr. Hall's compensation has totaled well over a quarter-billion dollars, according to a Wall Street Journal analysis of securities filings and Mr. Hall's compensation structure. One of those years he out-earned his boss, the head of Citigroup Inc., about five times over.

Last year, an unusually rough one for Citigroup, Mr. Hall's secretive trading unit, Phibro, generated close to 10% of the bank's total net income.

Mr. Hall's power at Citigroup is the result of his winning bets on oil and natural gas, part of a broader commodities boom that has swept the world this decade.

Yesterday, for the eighth straight day, the Dow Jones-AIG Commodity Index set a new record. Oil itself is within striking distance of its all-time high, in inflation-adjusted terms, of $103.76 a barrel, a record that has stood for more than a quarter-century. Oil set a new intraday high yesterday of $102.08 a barrel before closing at $99.64. The boom has spurred economists to re-evaluate what the world is willing to pay for everything from copper to coal.

Mr. Hall's bet -- that long-term and short-term energy prices would soon abandon their historical relationship with one another -- looked like a long shot when he made it. In making it, Mr. Hall individually took on more risk than Citigroup typically permits some groups of traders to carry, according to a person familiar with the bank.

Now, after 15 straight profitable years, Mr. Hall has considered breaking out on his own. Last year, for the first time, he began managing outside money for clients including investment giant Blackstone Group and others.

Officials at Citigroup say they are "committed" to Mr. Hall and to Phibro, a once-legendary but now nearly forgotten commodities firm that Citigroup inherited a decade ago.

Questions about the future of Phibro could add to the problems facing Citigroup and its new CEO, Vikram Pandit. A sprawling company with 300,000 employees, Citigroup is trying to nurture entrepreneurial talents like Mr. Hall, while curbing risk-taking elsewhere. The bank can ill afford to lose top performers after a tough 2007, in which it wrote off billions of dollars in failed mortgage bets.

Mr. Pandit and his team see Phibro as an "underleveraged" brand, which, while still a profit center, has fallen off the financial world's radar, one executive says. Some top executives at Citigroup hope to establish Phibro as a prestigious investment fund for Citigroup clients. That would move Phibro beyond its current role as a commodities shop trading solely on the bank's behalf, as Phibro has functioned for years.

Late last year, Citigroup told Phibro executives that it was interested in broadening the unit's scope by merging it into Citigroup's asset-management arm. That would effectively turn Phibro into a hedge fund, managing money for clients but much less of Citigroup's own capital.

The 57-year-old trader balked. Mr. Hall called the idea "a complete nonstarter," according to a person familiar with the exchange.

He preferred to preserve Phibro's operations as they have been. Mr. Hall tells friends that "benign neglect" on the part of Citigroup is why Phibro has thrived so far.

While Mr. Hall is on a winning streak this decade, he has had setbacks in the past. Phibro had three unprofitable years in 1991, 1992 and 1993, when it went through a rough patch with its refining businesses amid an economic downturn.

A naturalized American citizen, Mr. Hall no longer considers himself British. He has emerged as one of the world's top collectors of contemporary art, favoring often-shocking works that explore subjects including the human toll of the Nazis. He bought a nearly 1,000-year-old castle in Germany to display his collection.

In the Connecticut town of Southport where he lives, he is famous for waging a four-year battle with the neighbors to place "Etroits sont les Vaisseaux," or "Narrow Are the Vessels," an 80-foot-long concrete sculpture, on the lawn of his Greek Revival home.

He lost that fight in 2007 after Connecticut courts forced him to remove it from his lawn. He immediately replaced it with two, brightly painted, cartoonlike sculptures of cars by the artist Julian Opie.

Most afternoons Mr. Hall leaves the office to go rowing or to practice calisthenics with a ballet teacher.

Around 2003, Mr. Hall became convinced big structural changes were looming in the oil markets. For more than a decade, oil had ranged from $10 to $30 a barrel. But growth in demand was starting to outstrip growth in supply. And the once-sleepy economies of China and India were starting to compete for that fuel.

To place his bet, he focused on what was then a stagnant corner of the commodities world: The extremely long-term market in which traders buy and sell oil to be delivered years in the future.

Futures are contracts to buy or sell a product later on, at a price agreed upon today. Back in 2003, oil for future delivery was considerably cheaper than oil in the "spot," or current, market. For instance, a barrel of oil for delivery in 2005 was as much as 20% cheaper than spot oil.

There were valid reasons for this. Mainly, oil producers wanting to lock in future prices had to offer discounts on future oil to attract buyers, who preferred to speculate in the more volatile short-term markets.

Mr. Hall told his lieutenants that this would reverse itself: Soon, the market would need to put a premium on future oil as supplies became scarcer.

He started buying all the oil futures he could for delivery three to five years out. He also bought "call" options, which bestow the right (but not the obligation) to buy oil at a set price in future years. He made similar trades in natural gas.

He was so sure of his bet that he persuaded Tom Maheras, then head of Citigroup's trading businesses, and other higher-ups, to let Phibro increase its risk-taking.

The strategy worked. Around 2005, the discount for far-forward oil vanished and it began commanding a premium.

That year, tiny Phibro contributed $800 million or more in pretax revenue to Citigroup. Mr. Hall's pay totaled as much as $125 million, around five times that of Charles Prince, who was then Citigroup's chief executive.

That 2005 payday exceeded the nearly $70 million that then-CEO of Exxon Mobil Corp. Lee Raymond reaped in stock, cash and exercising of options that year when he retired.

Lately, although long-term prices have reverted to a discount, far-forward futures are retaining much of their value even amid fears of global recession.

Mr. Hall has sought profits in more unusual commodities, too. Twice in the past decade he has assembled big stockpiles of rhodium, an obscure metal used in catalytic converters. He got out both times at around 10 times his money.

In part because he has made so much money, Mr. Hall has a strong negotiating position with Citigroup. Persuading him to change his job could be tough. Mr. Hall has long been reluctant to integrate Phibro into the bureaucratic folds of Citigroup, even in small ways. He even keeps Phibro on its own email system.

While Phibro has been something of a stepchild at Citigroup, it has a rich history. Founded as Philipp Brothers in the early 1900s by two scrap-metal dealers in Germany, it became the largest supplier of raw materials in the world. In 1981 Phibro was so mighty it bought the storied Salomon Brothers investment bank.

Mr. Hall arrived in 1982 with an Oxford University chemistry degree and established himself as a star trader. By 1991 he had a seat on Salomon's board.

In the early 1990s he built a showcase headquarters on a former dairy farm in Westport, Conn., dubbed Nyala Farms. Executives could look down on the boisterous trading floor from a second-story catwalk.

Today, Mr. Hall still runs Phibro from Nyala Farms. But since Salomon's absorption into Citigroup in the late 1990s, Phibro has stayed under the radar.

Mr. Hall has scaled back to a skeletal crew of senior lieutenants in Connecticut, London, Geneva and Singapore. The front desk has no receptionist. The old trading floor is now used as a basketball court by hedge fund Pequot Capital.

A generous pay deal dating from the Salomon days lets Phibro keep 20% to 30% of its trading gains. Not only can that outstrip what others within Citigroup receive, it outshines some hedge funds, which typically keep 20% or so of profits.

A key to Mr. Hall's success, says a friend, Thomas Coleman, a Louisiana oil-storage executive and fellow art collector, is an ability to block out the noise of the crowd. When Mr. Hall "locks in on an idea, he'll take it to the extreme," Mr. Coleman says.

Because Mr. Hall usually doesn't sink time into short-term speculating, he's had the time to go art shopping. He has plowed an estimated $100 million into his collection, a person familiar with his moves says.

He buys mostly the work of living artists, which are often the riskiest bets. "Buying a Manet or a Cezanne is not a risk," says one of his dealers, New York gallery owner Mary Boone. "You've got a name brand."

With contemporary painters and sculptors, however, "you don't know which artists are going to survive, and which artists are going to disappear," Ms. Boone says.

As with oil, he sometimes zeroes in on out-of-favor artists, often buying not just one or two works, but snapping up entire shows. He recently staged a lavish exhibit in his German castle of works by U.S. artist and filmmaker Julian Schnabel. "Many in the art world have tried to ignore" Mr. Schnabel, Mr. Hall wrote in a book accompanying the show.

A recent re-evaluation of Mr. Schnabel's art has sent prices soaring. However, Mr. Hall rarely sells, so it's tough to know if his own aggressive buying has helped boost prices of the artists he collects.



	February 28, 2008