Hedge Fund Honcho’s Bet Pays Off Big

David Tepper’s shrewd bet that the nation would avoid a second Great Depression inspired him to buy bank shares at rock-bottom rates, a move that has earned his Appaloosa Management hedge fund an estimated $7 billion worth of profit during 2009.  Last winter, Tepper invested heavily in Bank of America stocks selling for $3 a share, as well as Citigroup, Inc. preferred stock, then priced at a bargain-basement $1 per share.

Tepper, a philanthropist who funded the Tepper School of Business at Carnegie Mellon University, made a gamble that is paying off in a big way – surprising skeptics who insisted that he was making a costly error.  “I felt like I was alone,” Tepper said.  There were days when “no one was even bidding.”  An improving market has seen Appaloosa Management earn a 120 percent return.  As a result of those gains, Tepper now manages approximately $12 billion, making his company one of the world’s largest hedge funds.

In general, hedge funds had a bad year in 2008, when they experienced a 19 percent decline.  Approximately 1,500 funds – 16 percent of the total – went out of business in 2008.  The funds had a far better year in 2009.  According to Hedge Fund Research, Inc., they are seeing a 19 percent return, the best annual gains in 10 years.

Alan Shealy, a long-time Tepper client, says “Investing with David is like flying, with hours of boredom followed by bouts of sheer terror.  He’s the quintessential opportunist, investing in any asset class, but you have to have a cast-iron stomach.”