Jessica Pressler's amazing New York magazine feature on Appaloosa Management founder David Tepper reveals, between the lines, the secret formula of the hedge fund trader's success: buying assets without leverage.
Over and over again, Tepper has hit on investment ideas that would be crippling if he was subject to margin calls. In 1998, for example, he went long Russian bonds on the assumption that Russia wouldn't default. Tepper was wrong—Russia did default. That was the default that crippled Long-Term Capital Management, a highly levered fund.
But while LTCM was forced to sell-assets in the wake of the default, Tepper kept buying Russian bonds. Tepper's lack of leverage permitted him to invest through the crisis while LTCM needed to be bailed out.
In the wake of the dot-com bust, Tepper's fund was down 25%—another loss that could have been crippling if counter-parties were able to demand collateral or close out short-term borrowing positions.
But, as Tepper told CNBC on Friday, he avoids leverage. So he was able to survive the downturn and return to profitability.