David Tepper Personally Earns $4 Billion for 2009 Performance

David Tepper grew up in a middle class neighborhood in Pittsburgh, PA. He became interested in the stock market after observing his dad, an accountant, trade stocks during the day. Following high school, he enrolled in the University of Pittsburgh, where he excelled. After Tepper graduated with a degree in economics, he found a job with Equibank as a credit analyst. He quickly became bored with the role and enrolled in the MBA program at Carnegie Mellon’s School of Business, now named after him. Tepper’s experience at Carnegie Mellon helped him learn options theory at a time when there were no textbooks written on the subject. Kenn Dunn, the Dean of school of the school himself taught these option courses.

After graduating, Tepper worked in the Treasury division at Republic Steel, once the third largest steel manufacturer in the U.S. Soon after, Tepper moved onto Keystone Mutual Funds, and finally to Goldman Sachs. At Goldman, Tepper focused on his original role as a credit analyst. However, six months later, he became the head trader on the high yield bond desk! Despite his successes, Tepper was not promoted to partner due to his disregard for office politics. After eight years at Goldman, he left and started Appaloosa Management in 1992 with Jack Walton, another Goldman Sachs trader.

With his background in bankruptcies and special situations at Goldman, Tepper applied his skills and experience at the new hedge fund, and it worked out tremendously for him. Tepper is categorized as a distressed debt investor, but he really analyzes and invests in the entire capital structure of distressed companies, from senior secured debt to sub-debt and post-bankruptcy equity. His fund has averaged a 30% average return since 1993! While that number is particularly high, Appaloosa has fairly volatile historical returns. In 2008, Tepper’s fund was down around 25% for the year. For the investor that stuck with him, this certainly paid off with a 120% return after fees in 2009. Tepper shies away from the typical glitz and glamour of the ostentatious hedge fund industry. Appaloosa is not based in New York, but in a small office in Chatham, NJ. It is only about 15 minutes from his house so he can spend more time with his family. The firm manages around $12 billion.

Tepper’s astronomical returns resulted from huge bets on the banking industry, specifically Bank of America (BAC) and Citibank (C). He bought BAC around $3.72 and Citi near $0.79. At year’s end, BAC ended at $15.06, a 305% return, and Citi ended at $3.31, a 319% return. Appaloosa also has invested in other financial companies such as Wells Fargo (WFC), SunTrust (STI), and Royal Bank of Scotland (RBS). Other companies Tepper has investments in are Rite Aid (RAD) , Office Depot (ODP), Good Year Tire and Rubber (GT), OfficeMax (OMX), and Microsoft (MSFT). He believes that valuations on stocks and bonds in the financial industry remain favorable, and he is now investing in commercial real estate, a place where many analysts expect huge losses.
Tepper’s investment strategy involves finding value in these distressed companies and betting big. He is not very diversified in his holdings compared to most hedge funds. Investing in these distressed companies can be a very lonely business. David Tepper stated about his recent purchases of BAC and Citi, “I felt like I was alone. No one was even bidding.” While some don’t like being alone, Tepper’s contrarian approach helped him scoop up these companies at bargain prices. Tepper reminds himself that he needs a contrarian attitude every day when he walks into his office and sees a pair of brass balls on his desk, literally. “Mr. Tepper keeps a brass replica of a pair of testicles in a prominent spot on his desk, a present from former employees. He rubs the gift for luck during the trading day to get a laugh out of colleagues.” While humorous, these brass balls represent his strategy of taking concentrated bets on these companies that the market does not see any value in.

David Tepper has not been without controversy. In his dealings with Delphi, an auto parts maker, his hedge fund along with other investors backed out of their exit financing agreement after Delphi sought additional funding from General Motors. His hedge fund believed accepting money from an automaker would hurt Delphi’s ability to win contracts with other automakers. The hedge fund also claimed that this funding arrangement broke their financing agreement. Delphi, in turn sued, declaring that the issue was a “story of betrayal and mistrust.” It has since gone into chapter 11 reorganization.

While most hedge fund managers who have made $4 billion in a year during one of the worst recessions since the 1930s would face scrutiny from the press, public, and government, Tepper has largely gone unscathed due to the lack of glitz and glamour of his lifestyle. Tepper lives in a New Jersey suburb in the same house that he bought in the early 1990s and coaches his kids’ sports teams. He is a family man is proud of raising three good children. He says, “It was much easier when they were younger. It’s harder now when they open the paper and see how much money I make.”

Last year, Tepper told the business school magazine at Carnegie Mellon that money should be a secondary goal, while living an upstanding life and pursuing what you enjoy should be the top priority. Tepper does not forget about his roots either. He regularly goes to Pittsburgh to visit his alma mater and to watch the Pittsburgh Steelers (of which he is now a part owner). He also donates money to food pantries and other charities around Pittsburgh. Tepper comes to Carnegie Mellon frequently to talk to students about what needs to be improved at the school. Students describe him as down to earth, friendly, and very candid. While he has been an extremely successful hedge fund manager, he does not lead an extravagant lifestyle and continues to deliver excellent results to investors. His philosophy is very simple: if you treat people right, run your business right, and run your life right, you will create a sustainable business.

1 http://web.tepper.cmu.edu/tepper/about.aspx

2 http://www.americanwaymag.com/carnegie-mellon-app…

3 http://seekingalpha.com/article/179565-2009-s-bil…

4 ibid

5 http://nymag.com/daily/intel/2009/12/david_tepper…

[6] http://dealbook.blogs.nytimes.com/2009/07/09/appa…

7 http://www.tepper.cmu.edu/news-multimedia/tepper-…

8 http://www.independent.co.uk/news/world/americas/…

9 http://www.pittsburghlive.com/x/pittsburghtrib/bu…

2010 Top 10 Highest Earning Hedge Fund Managers
Rank Name Firm Name 2009 Earnings
1 David Tepper Appaloosa Management $4 billion
2 George Soros Soros Fund Management $3.3 billion
3 James Simons Renaissance Technologies $2.5 billion
4 John Paulson Paulson & Co. $2.3 billion
5 Steve Cohen SAC Capital Advisors $1.4 billion
6 Carl Icahn Icahn Capital $1.3 billion
7 Edward Lampert ESL Investments $1.3 billion
8 Kenneth Griffin Citadel Investment Group $900 million
9 John Arnold Centaurus Advisors $900 million
10 Philip Falcone Harbinger Capital Partners $825 million

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