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article image$7 Billion Profit for U.S. Hedge Fund Bets on Banking Recovery

By Chris Dade     Dec 23, 2009 in Business
A U.S. hedge fund that was buying bank shares in early 2009, when most everyone else in the market was taking the safer options, has recorded a $7 billion profit this year to date, with the fund's founder and President earning himself a cool $2.5 billion.
David Tepper is the founder and President of Appaloosa Management L.P., a hedge fund based in New Jersey.
Once a junk bond trader with Goldman Sachs Mr Tepper started Appaloosa in 1993, the Wall Street Journal reporting that he did so because on several occasions he was passed over for a partnership with the famous Wall Street firm.
And so great has been the overall success enjoyed by Mr Tepper, a 52-year-old married father-of-three originally from Pittsburgh, that, according to the Guardian, his personal wealth was recently estimated to be $3 billion by Forbes magazine, reportedly making him the 97th richest person in the U.S.
But the size of Mr Tepper's wealth is seemingly set for a dramatic revision following news of the $2.5 billion he has personally earned with his bullishness regarding the financial sector.
Convinced that the U.S. government would not let some of the country's largest banks go under, and fairly certain that the banks would not be nationalized, in the early part of 2009 Mr Tepper opted to buy bank stock and debt, a policy his rivals did not appear eager to follow.
Sure also that government stimulus spending and low interest rates would bring about an economic recovery Mr Tepper snapped up shares in not just Bank of America and Citigroup, two of the Big Four banks in the U.S., but also in Lloyds and RBS, banks that have received financial support from the U.K. government.
Known, says the Wall Street Journal, for his habit of rubbing for luck a pair of brass testicles he keeps on the desk in his office and quickly turning on employees when he is angry, Mr Tepper has described how he felt like he was alone at one stage as no-one else was bidding on the shares he was happy to acquire.
Other senior figures at Appaloosa, despite sharing Mr Tepper's bullish outlook, were apparently still more cautious than him when it came to investing in banks whose futures were more than just uncertain in the eyes of many.
However Mr Tepper's optimism has been handsomely rewarded with the share prices for Bank of America now trading around $15 and the prices for Citigroup shares approaching $3.5, Mr Tepper having paid on average $3.72 and 79 cents respectively for those shares.
Management Today, praising Mr Tepper for "sticking his neck out" and noting that he epitomizes the "entrepreneurial spirit that drives economic growth", does however highlight the fact that he was not betting with his own money but with that of his investors.
Indeed the Wall Street Journal tells of how the owner of an investment firm in Boise, Idaho, contacted Mr Tepper to question the wisdom of his investment strategy. The client, Alan Shealy, eventually stuck with Mr Tepper, explaining:I figured the positions were fairly liquid, so if he was wrong, he would get out
Furthermore Mr Shealy, a client with Mr Tepper for 18 years, probably knew what to expect from the hedge fund boss, saying of the man with whom he has had a longstanding business relationship: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
Mr Tepper, whose office in Short Hills, New Jersey looks out on the parking lot of a Hilton hotel and is a short distance from a mall, albeit a supposedly upmarket mall, is now looking at generously priced commercial mortgage-backed securities as his next profit opportunity, having made an investment of $2 billion in that sector already.
A $55 million donor in 2004 to the business school at Carnegie Mellon University in Pittsburgh, Pennsylvania - it is his alma mater and the school was subsequently renamed the Tepper School of Business - Mr Tepper has had somewhat mixed fortunes over the years in relation to his investment strategy.
Big profits following the purchase of Korean stocks after the collapse of the Asian markets in 1997, investment in junk bonds in 2003 and investment in resource companies in 2008 have been offset by losses incurred when investing in the auto-parts supplier Delphi and the French financial services company Societe General. In 2008 Mr Tepper's fund even saw a decline that was 6 percent higher than the industry average of 19 percent.
Nevertheless his success in 2009, Appaloosa is thought to be one of the world's largest hedge funds, managing as it does $12 billion, will surely make the unquestionably poor performance of 2008 seem like a very distant memory for Mr Tepper.
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