Archive for the ‘Appaloosa’ Category

Top Hedge Fund Managers of 2009

Wednesday, March 9th, 2011

Hedge fund pay has always been astounding, but few realize that it is only a handful that make over $1 billion per year.  BBC recently released a report highlighting some of the most successful alternative asset managers in the world, which include David Tepper, George Soros, Steve Cohen, Edward Lampert, and Ken Griffin.

According to BBC, HF managers “wouldn’t even consider getting out of bed for the $13m (£8m) Goldman Sachs’ boss Lloyd Blankfein was paid last year. Such a trifling pay packet represents just a few days’ work for these staggeringly well-paid financial executives. If bankers inhabit a different world, says London-based headhunter John Purcell, “these guys are out on their own in a different universe”.

‘Private bunch’

So just how much do these guys – for the vast majority are men – earn each year? At the very top of the pile, we’re talking $4bn. Just in case that hasn’t quite registered yet – that’s four billion dollars. This does, of course, include bonuses and fees as well as salary. In fact, the salary is a tiny fraction of their overall pay. And who are these men? They are called hedge fund managers – in other words, they are investors who buy and sell all manner of financial instruments with the express aim of making money for their clients, and for themselves. Finding out much about them is notoriously difficult. ”They’re a very private bunch,” Mr Purcell explains, “largely because they earn so much. They are highly secretive in every aspect of what they do.” Discovering how they make their money is a little easier.

Popular myths

Hedge funds are actually one of the most misunderstood of all financial products. They get something of a bad rap, largely due to some spectacular failures, most notably Long Term Capital Management, which blew up in 1998 and almost took Wall Street with it, and Amarinth Advisors, which lost billions of dollars in a few weeks on bad natural gas trades in 2006. Many have also tried to blame them for some of the excessive risk-taking they say triggered the global financial crisis, but with little success. As one industry insider argues, hedge funds are worth around $1.5 trillion in total – “less than the assets that some individual banks have on their books”. Hedge funds, then, are not the the gung-ho, high-risk beasts of popular mythology. In fact, the majority are quite the opposite, seeking to produce what are called absolute returns – those over and above what you get from the bank, risk free – year in, year out. In other words, they are designed to be low risk. What sets them apart from most investment funds is the range of instruments they can use and the strategies they can employ. Whereas traditional fund managers buy shares and bonds in the hope that they will rise in value, or occasionally dabble in financial derivatives, their hedge fund counterparts can do so much more. For example, they can take advantage of movements in interest rates and currencies, company restructuring and bankruptcies, and pricing anomalies across different markets. One of their most important strategies is shorting – borrowing shares to sell into the market in the expectation that they will fall, then buying them back at the lower price. This means they can make money when markets fall.

Results business

This investment freedom is what attracts so many investment managers to hedge funds. That and the quite extraordinary sums of cash that the very best can earn, of course. In fact, many are not ready for the challenge. Encouraged by potentially huge fees, they begin running portfolios without the necessary knowledge and experience of the strategies they employ. As a result, many come unstuck. And this is one reason why it is rather unfair to compare directly the pay of hedge fund managers with that of bankers. For there is a very crucial difference – hedge fund managers get paid bonuses only when they make money. In other words, there is no reward for failure in this highly competitive business. Salaries in the industry are not dissimilar to those paid in investment banking, so to make seriously mind-boggling amounts of cash, managers need their performance-related fees. These typically amount to 20% of any returns made on a portfolio above a set benchmark, and this is how hedge fund pay rockets into the stratosphere and beyond. But for those that make no returns, through no one’s fault but their own, of course, the rewards are less attractive. In fact, the large number of managers who set up on their own don’t even have a salary to fall back on, although they do take a 2% management fee on the funds they manage. For this reason, “a lot of managers are not making any money at all,” says the industry insider. Equally, hedge fund managers invariably have their own money invested in the funds that they run, unlike bankers who generally stake other people’s cash. ”Investors are very keen to see the fund management company have ‘skin in the game’,” says Mr Purcell.

Celebrity pay

It’s also important to bear in mind that the very best-paid hedge fund managers – the John Paulsons and George Soroses of the industry – own their own companies. They take a cut on all the assets under management across a number of funds run by their firm. In other words, George Soros owns Soros Fund Management. By contrast, Lloyd Blankfein does not own Goldman Sachs. And while it’s relatively easy to find out what the boss of a public company owns, it’s far harder to discover what the owner of a private company pays him or herself. Individual hedge fund managers actually earn a fraction of what their employers earn – on average $4.9m in 2007, the last year for which figures are available. Still, nice work if you can get it. In fact, when it comes to comparisons, bank bosses are nowhere near the best paid executives of even publicly-listed companies. H Lawrence Culp Jnr, boss of US manufacturing and technology group Danaher, was paid $141m in 2009, while Larry Ellison, head of technology giant Oracle, got $130m, according to Forbes. Not even sports starts or actors can match that – Tiger Woods, for example, earned $91m, while Johnny Depp pulled in $75m. In the UK, the boss of consumer goods group Reckitt Benckiser, Bart Becht, was awarded £93m ($148m), while Sir Terry Leahy, outgoing chief executive of supermarket group Tesco, earned £18m, according to research company IDS.

Charitable giving

Staggering sums they may be, but they pale into insignificance compared with the multi-billion dollar packages the very top hedge fund managers earn. It is important not to forget the huge amounts in tax that those managers not based in tax havens, of which there are many, pay. Many also donate vast sums to charity and have become well-known philanthropists. Carl Icahn, for example, who earned $1.3bn in 2009, recently signed up to the Giving Pledge, a club of billionaires who have promised to give large chunks of their wealth to charity. Still, whichever way you look at it, $4bn sure is a lot of dough for one man to be earning over many lifetimes, let alone one year.

Are they worth it?

No doubt a good number of their clients, which include many the world’s biggest pension funds, will say that they are. Their tailors may well agree. Others may take a slightly different view.

Hedge fund rich list 2009

Hedge fund manager Hedge fund group Earnings
SOURCE: AR MAGAZINE
David Tepper Appaloosa Management $4bn (£2.5bn)
George Soros Soros Fund Management $3.3bn
James Simons Renaissance Technologies $2.5bn
John Paulson Paulson & Co $2.3bn
Steve Cohen SAC Capital Advisers $1.4bn
Carl Icahn Icahn Capital $1.3bn
Edward Lampert ESL Investments $1.3bn
Ken Griffin Citadel Investment Group $900m
John Arnold Centaurus Advisors $900m
Philip Falcone Harbinger Capital Partners $825m

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Tepper Nabs BofA’s Star Banker, Kaplan!

Wednesday, March 2nd, 2011

March 2, 2011: Tepper, the legendary founder of Appaloosa, the man who bought BAC at $3.00 and made $4 billion last year just outdid himself. One of Tepper’s biggest positions is Bank of America, and he just hired their head of mergers & acquisitions, Jeff Kaplan (we can only hope that their is no insider information exchanged, so that Tepper can stay in business). I lost some faith in the HF industry when Shumway and Level Global closed over the past two weeks. BAC has its hands tied, as the firm’s only bidder in the depths of the recession now seems to be its enemy…nice knowing ya Mr. Kaplan. The Bernanke put has made Tepper exceedingly jolly and audacious, as one can see clearly in the photograph above.

Bank of America Corp., the biggest U.S. lender by assets, said Steven Baronoff will assume Jeff Kaplan’s duties leading mergers and acquisitions.

Kaplan is leaving to join hedge fund Appaloosa Management LP, the Charlotte, North Carolina-based bank said today in a memo obtained by Bloomberg. Baronoff, chairman of global M&A, has advised on more than $1 trillion of transactions, including Procter & Gamble Co.’s purchase of Gillette, according to the memo from Thomas Montag, president of global banking and markets, and Michael Rubinoff and Purna Saggurti, co-heads of global investment banking.

Baronoff “will continue to serve as our most senior adviser to deal teams and clients globally,” according to the memo. “We thank Jeff for his dedication and leadership and look forward to working with him in the future.”

Kaplan joins Appaloosa, a Bank of America client, as chief operating officer, according to the memo. As M&A chief, he worked on deals including advising Marvel Entertainment Inc., led by Isaac Perlmutter, on its $4 billion sale to Walt Disney Co. in 2009.

John Yiannacopoulos, a Bank of America spokesman, confirmed the contents of the memo. The change was reported earlier by the Wall Street Journal.

– With assistance from Zachary Mider in New York. Editors: Dan Reichl, David Scheer

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net.

David Tepper Personally Earns $4 Billion for 2009 Performance

Sunday, December 26th, 2010

We thank Dan for his contribution to Leverage Academy, LLC and for writing this biography on David Tepper, of Appaloosa, who made $4 billion for himself last year.

David Tepper grew up in a middle class neighborhood in Pittsburgh, PA. He became interested in the stock market after observing his dad, an accountant, trade stocks during the day.  Following high school, he enrolled in the University of Pittsburgh, where he excelled. After Tepper graduated with a degree in economics, he found a job with Equibank as a credit analyst. He quickly became bored with the role and enrolled in the MBA program at Carnegie Mellon’s School of Business, now named after him. [1] Tepper’s experience at Carnegie Mellon helped him learn options theory at a time when there were no textbooks written on the subject. Kenn Dunn, the Dean of school of the school himself taught these option courses.[2]

After graduating, Tepper worked in the Treasury division at Republic Steel, once the third largest steel manufacturer in the U.S.  Soon after, Tepper moved onto Keystone Mutual Funds, and finally to Goldman Sachs.  At Goldman, Tepper focused on his original role as a credit analyst.  However, six months later, he became the head trader on the high yield bond desk!  Despite his successes, Tepper was not promoted to partner due to his disregard for office politics.  After eight years at Goldman, he left and started Appaloosa Management in 1992 with Jack Walton, another Goldman Sachs trader.

With his background in bankruptcies and special situations at Goldman, Tepper applied his skills and experience at the new hedge fund, and it worked out tremendously for him. Tepper is categorized as a distressed debt investor, but he really analyzes and invests in the entire capital structure of distressed companies, from senior secured debt to sub-debt and post-bankruptcy equity. His fund has averaged a 30% average return since 1993!  While that number is particularly high, Appaloosa has fairly volatile historical returns.  In 2008, Tepper’s fund was down around 25% for the year. For the investor that stuck with him, this certainly paid off with a 120% return after fees in 2009. [3] Tepper shies away from the typical glitz and glamour of the ostentatious hedge fund industry. Appaloosa is not based in New York, but in a small office in Chatham, NJ. It is only about 15 minutes from his house so he can spend more time with his family. The firm manages around $12 billion.

Tepper’s astronomical returns resulted from huge bets on the banking industry, specifically Bank of America (BAC) and Citibank (C). He bought BAC around $3.72 and Citi near $0.79. At year’s end, BAC ended at $15.06, a 305% return, and Citi ended at $3.31, a 319% return.  Appaloosa also has invested in other financial companies such as Wells Fargo (WFC), Suntrust (STI), and Royal Bank of Scotland (RBS). Other companies Tepper has investments in are Rite Aid (RAD) , Office Depot (ODP), Good Year Tire and Rubber (GT), OfficeMax (OMX), and Microsoft (MSFT).  He believes that valuations on stocks and bonds in the financial industry remain favorable, and he is now investing in commercial real estate, a place where many analysts expect huge losses.[4]

Tepper’s investment strategy involves finding value in these distressed companies and betting big. He is not very diversified in his holdings compared to most hedge funds. Investing in these distressed companies can be a very lonely business. David Tepper stated about his recent purchases of BAC and Citi, “I felt like I was alone. No one was even bidding.” While some don’t like being alone, Tepper’s contrarian approach helped him scoop up these companies at bargain prices. Tepper reminds himself that he needs a contrarian attitude every day when he walks into his office and sees a pair of brass balls on his desk, literally. “Mr. Tepper keeps a brass replica of a pair of testicles in a prominent spot on his desk, a present from former employees. He rubs the gift for luck during the trading day to get a laugh out of colleagues.”[5] While humorous, these brass balls represent his strategy of taking concentrated bets on these companies that the market does not see any value in.

David Tepper has not been without controversy. In his dealings with Delphi, an auto parts maker, his hedge fund along with other investors backed out of their exit financing agreement after Delphi sought additional funding from General Motors. His hedge fund believed accepting money from an automaker would hurt Delphi’s ability to win contracts with other automakers. The hedge fund also claimed that this funding arrangement broke their financing agreement. Delphi, in turn sued, declaring that the issue was a “story of betrayal and mistrust.” [6] It has since gone into Chapter 11 reorganization.

While most hedge fund managers who have made $4 billion in a year during one of the worst recessions since the 1930s would face scrutiny from the press, public, and government, Tepper has largely gone unscathed due to the lack of glitz and glamour of his lifestyle. Tepper lives in a New Jersey suburb in the same house that he bought in the early 1990s and coaches his kids’ sports teams. He is a family man is proud of raising three good children. He says, “It was much easier when they were younger. It’s harder now when they open the paper and see how much money I make.”[7]

Last year, Tepper told the business school magazine at Carnegie Mellon that money should be a secondary goal, while living an upstanding life and pursuing what you enjoy should be the top priority.[8] Tepper does not forget about his roots either. He regularly goes to Pittsburgh to visit his alma mater and to watch the Pittsburgh Steelers (of which he is now a part owner).  He also donates money to food pantries and other charities around Pittsburgh.[9] Tepper comes to Carnegie Mellon frequently to talk to students about what needs to be improved at the school. Students describe him as down to earth, friendly, and very candid. While he has been an extremely successful hedge fund manager, he does not lead an extravagant lifestyle and continues to deliver excellent results to investors. His philosophy is very simple: if you treat people right, run your business right, and run your life right, you will create a sustainable business.


[1] http://web.tepper.cmu.edu/tepper/about.aspx

[2] http://www.americanwaymag.com/carnegie-mellon-appaloosa-management-david-a-tepper-school-of-business-coo-and-president

[3] http://seekingalpha.com/article/179565-2009-s-billion-dollar-man-david-tepper

[4] ibid

[5] http://nymag.com/daily/intel/2009/12/david_tepper_made_7_billion_do.html

[6] http://dealbook.blogs.nytimes.com/2009/07/09/appaloosa-and-icahn-said-to-mull-bids-for-delphi/#more-85819

[7] http://www.tepper.cmu.edu/news-multimedia/tepper-stories/david-tepper/index.aspx

[8] http://www.independent.co.uk/news/world/americas/25bn-pay-packet-for-fund-manager-1847227.html

[9] http://www.pittsburghlive.com/x/pittsburghtrib/business/s_658849.html

2010 Top 10 Highest Earning Hedge Fund Managers
Rank Name Firm Name 2009 Earnings
1 David Tepper Appaloosa Management $4 billion
2 George Soros Soros Fund Management $3.3 billion
3 James Simons Renaissance Technologies $2.5 billion
4 John Paulson Paulson & Co. $2.3 billion
5 Steve Cohen SAC Capital Advisors $1.4 billion
6 Carl Icahn Icahn Capital $1.3 billion
7 Edward Lampert ESL Investments $1.3 billion
8 Kenneth Griffin Citadel Investment Group $900 million
9 John Arnold Centaurus Advisors $900 million
10 Philip Falcone Harbinger Capital Partners $825 million

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Check out our intensive investment banking, private equity, and sales & trading courses! The discount code Merger34299 will be activated until April 15, 2011. Questions? Feel free to e-mail thomas.r[at]leverageacademy.com with your inquiries or call our corporate line.