Who is David Tepper?
David Tepper is a legendary investor who specializes in distressed debt and manages one of the most successful hedge fund firms of all time. David Tepper’s worth is approximately $13 billion, according to Forbes 2020 The World’s Billionaires List.
Understanding David Tepper
David Tepper was born in Pittsburgh, Pennsylvania on September 11, 1957. He graduated from the University of Pittsburgh in 1978 with a degree in Economics. He earned his MBA in 1982 from what is now known as the David A. Tepper School of Business at Carnegie Mellon University. The business school was originally known as the Graduate School of Industrial Administration (GSIA). The school had its name changed in appreciation of the investing magnate after his generous gift of $55 million in 2003.
- David Tepper is considered one of the most successful hedge fund managers ever.
- Tepper started Appalooza Management L.P. after being passed over as a potential partner at Goldman Sachs.
- Tepper's hedge fund now largely manages money that is personally connected to him, but he continues to share his opinions on the market publicly.
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 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.
Tepper began his career with Goldman Sachs in 1985 as a credit analyst. He soon progressed to the high-yield desk as a head trader where he worked mainly with junk bonds. Tepper purchased distressed bonds of banks 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. However, after failing to make partner at Goldman Sachs, Tepper left the firm to strike out on his own.
David Tepper Launches Appaloosa Management L.P.
In 1993, David Tepper co-founded Appaloosa Management L.P. with a former Goldman Sachs colleague, Jack Walton. Appaloosa Management 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. In 2014, its assets under management exceeded $20 billion. David Tepper returned 20% of his investor capital in 2016. By 2019, Appaloosa’s assets under management were reportedly down to $14 billion with 70% of that total belonging to Tepper.
Appaloosa mostly invests in debt of companies in distress. Its 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. 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.
Tepper's aggressive style and confidence are often seen as his best traits as a hedge fund manager. 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 wrong, he kept buying the government bonds and eventually earned 60% on his bet.
Tepper's Performance During the 2008 Financial Crisis
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 larger rivals earning Tepper a handsome profit.
While panicked 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's Long Farewell
David Tepper is still active in the market, but he has expressed interest in converting to a family office. Appaloosa has repeatedly returned capital to its investors over the years and this trend has continued to the point where most of the money in the fund is personally connected to Tepper. Despite moving away from managing other people's money, Tepper is still a regular commentator on the market. Tepper's views can move the market in some instances when they are widely reported due to his track record as a hedge fund manager.