David Tepper

DEFINITION of 'David Tepper'

A legendary investor who specializes in distressed debt and manages what could arguably be the most successful hedge fund firm of all time.

David Tepper was born in Pittsburgh, Pennsylvania on September 11, 1957. He schooled at the University of Pittsburgh in 1978 where he obtained a degree in Economics. He earned an MBA from David A. Tepper School of Business at Carnegie Mellon University in 1982. The business school was originally known as the Graduate School of Industrial Administration (GSIA) and had its name changed in appreciation of the investing magnate after his generous gift of $55 million in 2003.

BREAKING DOWN 'David Tepper'

David Tepper started his career as a credit and securities analyst with Equibank. He moved on to work for Republic Steel as a financial analyst. It was at this juncture that Tepper got a firsthand experience of the credit structure of a distressed company when the steel company ran into financial troubles. His experience with money management came with his next job at Keystone Mutual Funds working on the high yield desk. In 1985, Tepper began his career with Goldman Sachs as a credit analyst and soon progressed to the high yield desk as a head trader where he danced majorly with junk bonds. He purchased distressed bonds of banks that were shaken by the junk bond market crash in 1989. Some of these banks survived their bankruptcy proceedings, making Goldman Sachs a lot of money through Tepper's skills.

In 1993, David Tepper co-founded Appaloosa Management L.P with a former Goldman Sachs colleague, Jack Walton. Appaloosa Management was started with $57 million in capital. In its first six months, Appaloosa delivered 57% returns on its assets and the fund grew to $300 million in 1994, $450 million in 1995, and $800 million in 1996. As of 2014, assets under management is worth more than $20 billion. According to Institutional Investor, $1 million invested in Appaloosa at its inception date would be worth $181 million in 2014.

The fund mostly invests in debt of companies in distress. Appaloosa’s first investment was in a distressed steel company, Algoma Steel, which was in bankruptcy court. Tepper bought the steel company’s preferred shares for $0.20 and sold them within a year for approximately $0.70.

He bet against internet companies in 2000 by shorting the Nasdaq Composite. He got out of the position after his investors’ emotions started kicking in. The dot com bubble did burst and Tepper lost out on an opportunity where he could have earned huge returns. This experience taught him an invaluable life lesson: taking the emotion out of investments, drowning out the noise, and staying focused on the important facts.

His fund lost 25% in the junk bond market crash 0f 2002 but soon recovered in subsequent years after successful bets were made on troubled and bankrupt companies like Enron, Worldcom, Marconi Corp., and Williams Co. The bonds he purchased in these companies contributed to a 150% gain in his portfolio position.

Early in 2008, Tepper made a bet that blue-chip stocks would rise. The market went on a downward spiral soon after and Appaloosa lost 25%. Following the 2008 subprime mortgage crash, Tepper was bullish on bank stocks when most investors were fearful and wary of these institutions. He bought preferred shares in Washington Mutual and Wachovia which were both bought out by bigger rivals earning Tepper a handsome profit. While panic sellers were driving down the value of financial institutions like Bank of America and Citigroup, Tepper was investing in them. The hedge fund tycoon also purchased about $2 billion face value of commercial mortgage backed securities floated by AIG. When the government intervened in the survival of these banks, Appaloosa made over $7 billion in profits, 120% net-of-fees return, and a take-home pay of $4 billion. Tepper’s trades following the 2008 market crash can arguably be labeled the greatest trades ever made.

David Tepper has broadened his aggressive bets beyond the shores of America. In the mid-to late 90s when certain emerging economies were on the verge of defaulting on their sovereign debts and investors were fleeing the other direction, Tepper took advantage of the negative situation by running an analysis of countries that were sure to recover. He bought debt in Argentina (Argentina Economic Crisis), South Korea (Asian Financial Crisis), and Russia (Russian Financial Crisis) which earned him returns of 42%, 30% and -30% respectively. Though he recorded a loss in his initial bet that the Russian government will not default, which turned out to be a wrong assessment, he kept buying the government bonds and eventually earned 60% on his bet.

From its inception to 2014, Appaloosa has returned capital to its investors five times. In a bid to be focused, Tepper normally gives excess cash back when he decides the fund is growing to an unmanageable size.

In addition to the $55 million given to Carnegie Mellon University in 2003, Tepper also donated $67 million to the university in 2013. The University of Pittsburgh and Rutgers University have also benefited from his educational charitable donations. Other foundations that he has given generously to include The Robin Hood Foundation, Teach for America, and Better Education for Kids political action group that was co-founded by him. Appaloosa pledged $20 million to various charities in 2013 to celebrate its 20th anniversary.

Appaloosa was ranked the 23rd largest hedge fund company in the world in 2014. David Tepper was ranked the highest hedge fund earner for 2013 when he earned $3.5 billion. As of 2014, David Tepper is worth approximately $10 billion according to Forbes Billionaires’ List.