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Hedge Fund King David Tepper Explains His Consistent Inconsistency

Though very few hedge funds on the Street can claim to compare to the 17-year track record of David Tepper’s Appaloosa Management, LP, the only thing that is consistent about the performance of the fund is that it is, well, inconsistent.

“We’re consistently inconsistent”, the legendary billionaire investor says over a lunch of spicy tuna rolls and salad at his office in Short Hills, NJ, earlier this week. “It’s one of the cornerstones of our success.”

Inconsistent maybe. Incredible, certainly. Last year, Tepper’s flagship Appaloosa fund returned an eye-popping 132.7%, net of fees, after grossing $7.5 billion by betting on financials early on, more than any other hedge fund firm last year. Through July of this year, the fund is up almost 42% on a net trailing annulized basis, according to performance documents from an investor.

When Lehman Brothers filed for bankruptcy in September 2008, investors panicked on Wall Street, causing dangerous aftershocks across the markets. And while most of Appaloosa’s peers were desperately trying to mitigate losses and stave off redemption requests amidst the market’s free fall, Tepper decided it was the perfect time to leap right into the eye of the storm.

So the fund started aggressively buying up depressed bank debt of holding companies like Washington Mutual and common and preferred stock of Wachovia and others.

One has to wonder if the guy eats nails for breakfast.

“We lead he herd,” he chuckles. “The Street follows us, we don’t follow the Street.”

Tepper was sitting on a pile of cash, having sold out of most of his positions in the spring of 2008, and didn’t have any debt. So when the U.S. Treasury put out a white paper in February 2009 announcing its Financial Stability Plan, which included the Capital Assistance Program designed to shore up the capital of banks, he took his time and read the fine print.

The white paper and term sheet said the preferred stock the government was buying in the banks would be convertible to common shares at prices far above current trading levels at the time — which meant it was indeed a time to buy, buy, buy.

So he did. The fund began amassing sizable positions in bank-related securities: common and preferred shares, and junior-subordinated debt, to be exact. His targets, Bank of America and Citigroup in particular, as rumors circulating that the banking behemoths would be nationalized in early 2009 edged the stocks to near collapse.

Tepper was able to buy Bank of America preferred shares at just twelve cents on the dollar and Citigroup bonds at just nineteen cents. As those stocks rallied by the end of 2009, Appaloosa raked in the billions.

Appaloosa also was able to buy about a billion dollar’s worth of AIG’s commercial mortgage-backed securities at nine cents on the dollar. Currently trading at about ninety-three cents, the “AIG ace” was a major coup and contributor to the firm’s success in 2009.

“Most of the upside was on the preferred and debt side, “ he says. “That’s perhaps why so many people missed this trade. They just couldn’t see it.”




Correction: The previous graphic in this story has been pulled because of incorrect information

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