Jan 17, 2010
Top Performing Hedge Funds 2009
via Bloomberg Markets
Be sure to read the accompanying article:
David Tepper often throws a $20 bill on the floor when he’s weighing a big investment with analysts at Appaloosa Management LP.
“Would you pick that up?” Tepper, founder and president of Appaloosa, asks them. His point: The best trades can be like found money.
That was the case in early 2009, he says. Shares of banks such as Citigroup Inc. and Bank of America Corp. were collapsing on rumors they would be nationalized. On Feb. 25, the U.S. Treasury put out a white paper and a term sheet on its Web site for the government’s Capital Assistance Program. They said the preferred stock the government was buying in the banks would be convertible to common shares at prices far above where they were trading — 37 percent higher in the case of Citigroup and 21 percent for Bank of America, Bloomberg Markets reported in its February 2010 issue.
For Tepper, 52, that meant it was time to buy. “If the federal government was putting out this paper, they weren’t going to nationalize the banks,” he says.
Second, the conversion price of the preferred shares meant the bank stocks were seriously underpriced.
“It was crazy,” says Tepper, a Pittsburgh native. “In February and early March, people were in a panic.”
Appaloosa began scooping up bank-related securities, including common and preferred shares and junior subordinated debt. The Short Hills, New Jersey-based hedge fund firm bought into Bank of America, Citigroup, Fifth Third Bancorp and SunTrust Banks Inc. Tepper also bought the bonds of New York- based American International Group Inc., Frankfurt-based Commerzbank AG and London-based Lloyds Banking Group Plc, paying as little as a nickel on the dollar…
Seizing opportunity out of chaos is the philosophy that has guided David Tepper for years. And his investors know it. Even in the midst of the 2008 meltdown, Appaloosa got relatively few redemption orders, Tepper says. In any case, all investors agree to three-year lockups, and Tepper can limit withdrawals to 25 percent of the requested amount.
Still, Tepper says he doesn’t want to gather assets simply for the sake of reaping more fees — a surefire prescription for undermining returns. Five times in the fund firm’s history he has returned investors’ capital when Appaloosa had trouble putting it to work.
If there isn’t a $20 bill on the floor to pick up, Appaloosa isn’t interested.
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