Move over, George Soros. Same with you, John Paulson. The worldwide hedge fund community may be readying itself to anoint its newest superstar, a relatively unassuming fund manager from Short Hills, New Jersey. According to an article written by Gregory Zuckerman and published in the Wall Street Journal, fund manager David Tepper of Appaloosa Management has reaped billions of dollars for himself and his firm over the past year by purchasing debt and shares in struggling banks.
Tepper, a former junk bond trader at Goldman Sachs, left the firm in 1993 to start Appaloosa. Since then, he has posted annual returns in excess of 30% per year, largely by placing highly-concentrated bets with out-of-favor companies and themes. In the late 1990’s, his firm profited by purchasing Korean stocks and Russian debt, cashing in when those markets rebounded. Similarly, a sizable investment in resource-related firms paid off when the commodities markets exploded in 2008. In contrast, some of his notable losses include a failed investment in auto parts maker, Delphi, which cost him $200 million in 2006, and last year’s poorly-timed investment in large cap stocks, which ultimately cost him $1 billion as the stock market tumbled.
The seed for Tepper’s most recent victory was planted last February, when the Treasury Department announced the launch of the Financial Stability Plan, a project by which the government would inject much-needed capital into banks by purchasing shares of preferred stock. At the time, most investors feared that the nation’s major banks would be nationalized, despite reassurances from government officials. In response, Tepper instructed his traders to scoop up preferred shares of Bank of America Corp. and Citigroup Inc., even as their share prices cratered well below $5.00.
Despite analysts’ warnings, Tepper held strong in his belief that the US government would honor its commitment to save the ailing banks. That conviction has been rewarded handsomely this year, as shares of Bank of America and Citigroup have rebounded and now trade at $15.03 and $3.40. Despite liquidating a portion of his shares, and thus locking in sizable gains, Appaloosa still maintains a considerable stake in each bank.
Tepper’s bold investment has yielded his firm over $7 billion in profits this year, not to mention a cool $2.5 billion for himself. Nonetheless, it appears unlikely that this sudden success will go to Tepper’s head. Around the office, Tepper displays an affinity for sneakers and jeans, and he still lives in the same home he bought in 1990.
In recent months, Tepper has moved on to commercial real estate, buying debt backed by struggling properties, particularly in New York. He reasons that as several large-scale real estate properties go belly-up, he will profit as they restructure their debts.
In a sense, this latest investment mirrors his 2009 investment in the banks, as Tepper is buying “when others are fearful,” as Warren Buffet would say. Whether this strategy repeats the success of 2009 remains to be seen. Regardless of the outcome, Tepper’s year should warrant his mention amongst the industry’s elite.
