David Tepper, the billionaire head of Appaloosa Management, has decided to return 20% of investor capital to his clients by the end of 2016. The return, which amounts to about $3 billion, is not the first of its kind. in fact, Appaloosa has made investor returns of its own volition for the past five years as well. What does the prospect of a voluntary hedge fund return of assets to its investors mean for that fund, and what does it suggest about Tepper's view of the markets?
Down to $16.5 Billion in AUM
The planned asset returns will bring Appaloosa's total assets under management to about $16.5 billion. Most of these assets will belong to either Tepper or various employees of Appaloosa. Though this might be seen by some analysts as a bearish outlook on the future of the markets, Tepper does not seem to believe that the economy is in particular trouble. He has voiced his optimism regarding the upcoming transition to the Trump administration based on president-elect Trump's policy plans involving lowering tax rates. At the same time, though, there is widespread concern about how other aspects of Trump's policies will impact the lower-income workers he targeted during his presidential campaign.
Long Equities, Short Bonds
For the time being, Tepper has positioned himself to be long equities and short bonds for both European and U.S. markets. Tepper has also set himself long the dollar in relation to the yen and the euro. Investors across the country watch Tepper's investment decisions closely and often tend to duplicate his choices, and with good reason; Appaloosa has managed to post gains of 5% for 2016 through the month of November. This is not the most remarkable figure, but it is a solid return in comparison with many hedge funds that have been consistently losing in the years since the 2008 crisis.
One question that Tepper and most other major investors are grappling with is exactly how much of the possible economic benefits prefigured by the Trump administration already included in the market shifts that have taken place since the election. Considering the rally in the market since the election and the steady climbing of interest rates, Tepper and others may be concerned that it will become harder and harder to make money in the current climate.
Tepper opted to return about $2 billion of Appaloosa assets to investors last year, and this process has happened for six consecutive years as of 2016. Starting 2017 with $16.5 billion in AUM will place Appaloosa at its lowest volume of assets to begin the year for many years. In comparison, the firm began 2016 with slightly over $18 billion.