That strategy handed Mr. Tepper, a plain-spoken Pittsburgh native who first made his name at Goldman Sachs, the top spot on the annual ranking of top earners in the hedge fund industry by AR: Absolute Return+Alpha magazine, which comes out Thursday.
His investors did not do badly, either — Mr. Tepper’s flagship fund gained more than 130 percent last year.
The runner-up in the ranking was George Soros, the Hungarian émigré who has become better known in recent years for supporting Democratic candidates and making political headlines than for picking stocks. His fund, Quantum Endowment, grew 29 percent in 2009, earning Mr. Soros $3.3 billion in fees and investment gains.
Hedge funds — the elite, lightly regulated investment vehicles open to a restricted range of investors — enjoyed a winning streak during the buyout boom that preceded the financial crisis in 2008. Then the bottom fell out of the industry, handing even top hedge funds double-digit percentage losses. In turn, the earnings of the top 25 fund managers in the 2008 survey tumbled 50 percent.
At the time, some market experts questioned whether the industry could continue to charge hefty fees — a manager typically receives a substantial portion of the fund’s annual appreciation — for such uneven performance. After all, hedge funds were supposed to protect investors against market volatility, not subject them to it.
But in a startling comeback, top hedge fund managers rode the 2009 stock market rally to record gains, with the highest-paid 25 earning a collective $25.3 billion, according to the survey, beating the old 2007 high by a wide margin.
The minimum individual payout on the list was $350 million in 2009, a sign of how richly compensated top hedge fund managers have remained despite public outrage over the pay packages at big banks and brokerage firms.
Even so, big gains were not a constant among hedge funds last year. Many struggled to show gains, signaling a widening gulf between winners and losers, industry experts said.
“There are the haves and the have-nots,” said Sandy Gross, managing partner of Pinetum Partners, an executive recruiter for hedge funds. “These guys are the exceptions. You’re talking about the top people at top firms.”
The earnings figures reflect AR magazine’s estimation of each money manager’s portion of fees as well as the increased value of his personal stake in his fund.
For many of the top 25, the big personal gains in 2009 came after steep losses in 2008. Half of the top 10 managers in 2009 lost money the year before, including Mr. Tepper, whose flagship fund, Appaloosa Investment Fund I, dropped 27 percent in 2008.
Undaunted by that drop — and by the bankruptcy and liquidation of Lehman Brothers — Mr. Tepper loaded up on the preferred shares and bonds of the big banks in late 2008 and early 2009, correctly assuming that the government would not permit bigger institutions to fail.
It did not hurt that the Treasury Department was a fellow investor, buying preferred stock and warrants to help steady the faltering balance sheets of the banks. The government has since sold many of its bank stakes at a considerable profit.
Mr. Tepper, who manages about $12 billion for investors, also benefited from a successful investment in bonds of American International Group, the giant insurance company that was also rescued by the government.
In retrospect, investing in major banks might not seem so risky, but Jim McKee, a hedge fund researcher for the consulting firm Callan Associates, said it was a tougher call to make than simply buying up distressed mortgage bonds, which Mr. Tepper did in addition to buying bank debt.
At the time, Mr. McKee said, “it was questionable whether the banks would be around. That was definitely a braver bet.”
Besides Mr. Tepper, the losers turned winners in 2009 included Steven Cohen (No. 5), Edward Lampert (No. 7), Kenneth Griffin, (No. 8) and Philip Falcone (No. 10).
Mr. Griffin enjoyed an especially sharp turnaround, earning $900 million as his flagship funds jumped 62 percent in 2009, compared with a 55 percent plunge in 2008.
A spokeswoman for Mr. Griffin declined to comment.
Three managers among the top 10 — Mr. Soros (No. 2), James Simons (No. 3) and John Paulson (No. 4) — were back-to-back winners, having profited during the lean times of 2008 as well as in the booming market of 2009.
Mr. Paulson attracted fame for betting against subprime mortgages at a time when many of his rivals had not even heard of the now notorious class of assets. That secured him the No. 1 spot in 2007, when he earned $3.7 billion, the biggest annual take for a hedge fund manager until Mr. Tepper eclipsed him last year.
Mr. Paulson was an especially adroit trader, making huge profits on bets against bank stocks in 2008 and then buying them back after they were beaten down.
A spokesman for Mr. Paulson said he was not available to comment.
This year it will probably be harder to achieve the kind of outsize returns enjoyed by Mr. Paulson in 2007 and Mr. Tepper in 2009, given the recent run-up in both stocks and bonds.
“Last year, there was a great opportunity in debt. It was very, very undervalued,” said Carl C. Icahn, the legendary investor known for his aggressive corporate takeovers, who ranked No. 6 on the list with a personal gain of $1.3 billion. “Today, it’s fully valued. There are still great opportunities in bankrupt companies, but dealing with bankruptcies is an arcane art and much more complicated than simply buying distressed debt.”
Finding new opportunities is not the only challenge facing even the most successful hedge fund managers. In Congress, there is growing pressure to treat some earnings of hedge fund managers as income instead of capital gains, which are taxed at a lower rate.
Nevertheless, running a hedge fund will remain the best way for aspiring stock-pickers to make billions on Wall Street, even if they will have to hand over more of their profits to Uncle Sam.
“It’s certainly not going to drive them to some other field,” Mr. McKee said.