David Tepper Hedge Fund Strategy

David Tepper Hedge Fund Strategy: Investing well often comes down to two things – heavy amounts of research and a dose of luck.

Often, the biggest winners seem to have a little of both. After all, preparation plus luck equals opportunity, or so the old saying goes.

In order to position themselves to take advantage of the point where luck and research meet, many investors like to follow top hedge funds and the people who manage them.

Often, these entities have access to tremendous amounts of research and a greater understanding of the market. When the top performers effectively “double-down” on a stock, it can mean good things for investors.

One of the investing superstars many like to follow is David Tepper.

“I would rather be lucky than be smart. But you have to be smart enough to put yourself in a position to be lucky.” – David Tepper

Introducing David Tepper

David Tepper is such a successful businessman, Carnegie Mellon named its business school after the Pittsburgh native. Tepper is known for the ability to pull in big returns and for his personality. The man is also a noted philanthropist.

Tepper started his career at Goldman Sachs. He spent six months there as a junk bond analyst before being promoted to head junk bond trader. During his time in the trenches, Tepper made investment after investment.

After he eventually turned $3 million of his own money into $7 million, he left Goldman to open his own shop in 1993. Tepper raised another $50 million in outside capital and created Appaloosa Management.

The success of Appaloosa enabled Tepper to let his philanthropic side loose. He has supported a variety of causes, like gay marriage, and given heavily to his alma mater, Carnegie Mellon.

He donated $55 million to the school, which is the largest gift the university has ever received (hence naming the business school after him).

What is Appaloosa Management?

Appaloosa Management had somewhere around $16.5 billion in its portfolio at the end of 2017. By the end of 2018, that number shrank to $11.6 billion. Around 70% of that was Tepper’s own money – and he did well with that.

Appaloosa boasts an annualized return of over 25% since its beginning. That number is impressive, but what is even more shocking is the fact that Tepper changed his strategy and didn’t miss a beat.

When Appaloosa first opened its doors, the hedge fund was focused on distressed credit. For instance, during the financial crisis, Tepper bought shares in distressed banks and earned billions for his fund.

David Tepper Hedge Fund Strategy

David Tepper uses a value investing strategy that is very much like that of Warren Buffett.

Tepper focuses his efforts on fundamental analysis to identify quality stocks then he concentrates on a handful of good ideas and invests the lion’s share of his portfolio there.

You can see that strategy in the way that roughly 45% of Appaloosa’s portfolio was concentrated on just three stocks. In the words of Buffett,

“Very few people have gotten rich on their seventh best idea, but a lot of people have gotten rich with their best idea.”

Tepper also has the ability to spot an opportunity:

“We have this saying: The worst things get, the better they get. When things are bad, they go up.”

Fearful environments tend to devalue stocks that are fundamentally strong. Tepper steps in when the price is low and sells when the price is high: “We do this to make money and send it back to people, not to collect assets. I love the game.” Investing to Tepper is unemotional.

David Tepper also doesn’t limit his investments to stocks. Outside of his top ideas, he tends to invest in preferred stock and bonds. Tepper is known for investing in distressed debt then converting it to equity ownership.

David Tepper Hedge Fund Holdings

That said, Tepper’s investment strategy shifted away from distressed debt over the years. He morphed into more of an activist investor and he started making calls on how the economy would perform.

Tepper also developed an interest in technology. At last check, more than half of Appaloosa’s public holdings were centered on the industry, with the services market taking up the next largest percentage.

Appaloosa’s top three holdings were Alphabet (aka Google), Facebook, and Amazon. These stocks comprised just under 16%, 15%, and 14% of the hedge fund’s portfolio, respectively.

In May 2019, David Tepper announced that he would be returning money to his investors and closing shop.

His intention is to turn Appaloosa into a family office that manages the wealth he has accumulated over the years and that of a handful of others. Tepper will continue to manage investments for 15 investors.

David Tepper Hedge Fund Returns

David Tepper’s hedge fund produced strong returns. There have only been three occasions when the fund was down 20% or more, but Tepper quickly rebounded.

Had you been lucky enough to invest $1 million in Appaloosa when it first started, you would have roughly $149 million today and that is AFTER fees.

The fund has returned an average of over 25% per annum since its inception.

David Tepper NFL Team Owner

Tepper has a long history of NFL team ownership. At one point, he owned a piece of the Pittsburgh Steelers. Then, in 2018, he bought the Carolina Panthers for $2.2 billion.

One of the reasons Tepper is returning his investors’ money is so that he can focus his attentions there. He wants to improve the stadium and develop partnerships to ultimately make money for the Panthers. Tepper also wanted to change how the team managed. In December 2019, he fired the head coach.

Tepper may also get involved with the “other football” – soccer. According to the WSJ, he wants a Major League Soccer team in Charlotte, the home of the Carolina Panthers.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.