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Who is David Tepper? The Story of a Billionaire Hedge Fund Manager
By Hao Li | 01/22/2011 12:33 AM HKT
Like many ultra-successful hedge fund managers, David Tepper has kept a low profile for many years.
However, in 2009, he was propelled to the spotlight when he made $7 billion for his fund Appaloosa and $4 billion for himself.
Those are astounding figures.
As far as I know, with the obvious exception of John Paulson's once-in-a-lifetime subprime mortgage bet, $4 billion is the highest one-year pay ever for a hedge fund manager.
Over his 17-year hedge fund career, Tepper returned on average roughly 40 percent annually for himself and 30 percent annually for his investors.
He is also the namesake of Carnegie Mellon's Tepper School of Business.
Tepper is very interesting because of his rather unique specialty, which is distressed investing. Indeed, it was distressed investing that earned him that $4 billion payday in 2009.
The largest and most successful hedge funds generally use global macro, quant strategies, or stock-picking/value investing. The investing public is pretty familiar with those concepts.
However, distressed investing, Tepper's specialty, is not given too much attention.
In recent years, Tepper became less media shy. As he becomes more accessible, his under-reported style of investing will likely receive more attention.
Below is a comprehensive professional biography of David Tepper gathered from publicly available information:
- In his younger days, he memorized statistics on the back of baseball cards, showing early signs of a near-photographic memory. In high school, he traded penny stocks with the assistance of his father. (Source: Bloomberg)
-He graduated from the University of Pittsburgh with a degree in economics, and went on to get his MBA from Carnegie Mellon University.
-As a student at the University of Pittsburgh, he developed a system for trading options in order to help with his expenses. (Source: Bloomberg)
-As a Carnegie Mellon MBA, Tepper was a "star" student. Dean Kenneth, who taught Tepper in an options class, said the latter was known for asking him tough questions (Source: Bloomberg)
-His first job upon graduation is at the finance department of Republic Steel Corp. This gave him first-hand experience working at a distressed company. (Source: Bloomberg)
-After two years, he landed a job as a credit analyst in Keystone Funds. Then, in 1985, Tepper joined the newly-formed high-yield bond desk at Goldman Sachs as an analyst. He quickly moved to trading and showed himself to be a "lead dog." By 1986, he was the head of the junk-bond desk. (Source: Bloomberg)
-During the junk-bond boom of the 1980s, Tepper's desk prospered and became one of the biggest money-makers at Goldman Sachs.
-When the junk bond market imploded in 1989, Goldman Sachs' desk survived thanks to Tepper's adroitness. He purchased bonds of banks that had been severely crippled by the crash. When some of these institutions emerged from bankruptcy and the market recovered, his investments soared. (Source: New York Magazine)
-However, he didn't play politics right at Goldman Sachs and was passed over for partnership in 1988, 1990, and 1992, despite his stellar performance. He quit Goldman Sachs in 1992 to strike out on his own.
-Michael Price, a mutual fund manager and Goldman Sachs client, lent him a desk. Tepper then began to trade "aggressively" for his own personal account, hoping to raise enough money to start his own fund. (Source: New York Magazine)
-After notching "a few big scores under his belt," Tepper founded Appaloosa with Jack Walton, another Goldman Sachs junk-bond trader. The fund started with $57 million. (Source: New York Magazine)
-In the second half of 1993, his fund recorded a 57.6 percent net gain. Assets under management (through gains and through signing on new investors) ballooned to $300 million at the end of 1994, $450-million at the end of 1995, and $800-million at the end of 1996. (Source: Bloomberg)
-One of his early investments was in Algoma Steel, which emerged from bankruptcy in 1993. After reading the prospectus, Tepper found that the preferred shares were actually "first mortgage bonds whose collateral was Algoma’s plants and headquarters." He bought these preferred shares at 20 cents on the dollar and sold them within a year for 60 to 80 cents on the dollar. (Source: Bloomberg)
-In 1995, his purchase of Argentine sovereign debt helped his fund return 42 percent. He reasoned that "rising bank deposits portended a strengthening economy." (Source: Bloomberg)
-In 1997, as the Korean won fell 50 percent on the heels of the Asian Financial crisis, Tepper bought won futures and Korean government bonds. His fund returned 30 percent that year (Source: Bloomberg).
-He made a costly error in 1998. He bet the Russian government wouldn't default on its debt, which it unfortunately did. His fund lost 30 percent.
Because his portfolio is concentrated, the returns can be volatile; he returned over 100 percent in certain years but lost at least 20 percent in each of 1998, 2002 and 2008. (Source: Bloomberg)
-As Russian bonds tanked, Tepper kept on buying. When the market recovered, his position helped him return 60 percent in 1999. (Source: New York Magazine)
-In 2000, he shorted the tech-heavy Nasdaq Composite. However, because his investors complained so much, he took off the position. A few months later, the tech bubble began to collapse. Tepper "fumed" and hasn't "paid his investors' nerves much heed" since that time. (Source: WSJ)
-In 2002, the junk bond market collapsed again. His fund lost 25 percent.
Tepper bought the bonds of three giant bankrupt companies: Enron, WorldCom, and Conseco. In the following year, these positions helped him return a whopping 148 percent. (Source: New York Magazine)
-In 2002, Tepper bought the senior debt of Marconi Corp, which was trading for less than the cash on the company's balance sheet. “It’s nice when you can buy cash when it’s cheaper than cash,” he said. (Source: Bloomberg)
-From 2002 to 2003, his purchases of debt from troubled utilities like Williams Co. also boosted his returns. (Source: Bloomberg)
-Around 2003, Tepper's personal wealth exceed $1 billion for the first time. He soon donated $55 million to Carnegie Mellon's business school, which today bears his name. (Source: New York Magazine)
-From 2004 to 2007, his returns were subpar (compared to his stellar returns in previous years) because of low market volatility and the lack of bankruptcies. (Source: Bloomberg)
-In 2008, Tepper lost big again. He bet early in the year that big cap stocks would rally, so he bought individual stocks and broad market futures. Of course, the market lost big in the first half of 2008 and his fund lost 25 percent.
-In 2008, he lost $200 million in an unsuccessful deal to invest in Delphi, a bankrupt auto parts supplier.
-In 2008, he bought preferred shares in Wachovia and Washington Mutual for 20 cents on the dollar. After these two companies were bought out by larger rivals and the preferred shares soared, Tepper's investment paid off handsomely. (Source: Bloomberg)
-His big year was 2009. He turned bullish early in the year on bank stocks, which were tanking and heavily out of favor. Investors were simply too afraid that the government would nationalize them. Ignoring the pessimism, Tepper bet the government wouldn't because the Treasury promised to buy preferred stocks in these banks. Moreover, the conversion price to equity for the preferred shares were much higher than prevailing market prices.
At one point in March, his fund was down 10 percent, or $600 million. Tepper also found out that he was the only big buyer in these banks at the time.
Things eventually turned around, however. The government didn't nationalize these banks and their securities soared, scoring Tepper one of the biggest annual paydays in hedge fund history. (Source: WSJ)
-At the peak, 30 percent of his fund was in securities of financial companies in 2009. (Source: Bloomberg)
-In early 2009, he bought American International Group's debt for 10 cents on the dollar. After receiving government assistance, prospects for the company looked much brighter and Tepper's investment soared to 61 cents on the dollar by December 2009. (Source: Bloomberg)
-In 2009, he also purchased $2 billion in commercial mortgage-backed securities. Peter Cooper Village & Stuyvesant Town and 666 Fifth Ave. were two of the commercial properties.
-Late in 2010, Tepper turned bullish on U.S. equities because the Federal Reserve signaled it was willing to conduct a second round of quantitative easing. (Source: CNBC)
-Early in 2011, he remained bullish on U.S. stocks and the economy. In particular, he was upbeat about Dean Foods (NYSE:DF) and Micron Tech (NASDAQ:MU). (Source: CNBC)
-He claims to have popularized the Wall Street saying "it is what it is." (Source: WSJ)
-His fund Appaloosa returned capital to investors five times in its history. (Source: Bloomberg)
- At the height of the financial crisis, Appaloosa received few redemption requests. All Appaloosa investors agree to three-year lockups and redemptions can be limited, at Tepper's discretion, to 25 percent of the requested amount. (Source: Bloomberg)
-To make a point to his analysts when weighing investment decisions (probably in distressed debt), Tepper often throws a $20 bill on the floor and asks, "Would you pick that up?" (Source: Bloomberg)
-Former colleague Jonathan Kolatch said of Tepper: "He takes a macro perspective on something, for instance this European sovereign crisis, which is that ‘it’s not going to be that bad. And then he takes that and applies it to a micro idea, a particular stock, as opposed to saying I’m going to do this with the currency or do this with the interest rate, which is kind of what the macro guys do. He’ll buy these particular three stocks that will reflect this macro idea." (Source: New York Magazine)
Email Hao Li at hao.li@IBTimes.com
hken.ibtimes.com/articles/103669/20110121/.htm
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