What Does It Take to Be a Top Dog Hedge Fund Boss?

After losing 19 percent on average in 2008, hedge funds have racked up big gains in 2009. Energy funds, Russian and Eastern European funds and Convertible arbitrage have posted gains ranging from 32 percent up to 54 percent, according to data from Hedge Fund Research Inc.

But the big winner was David Tepper’s Appaloosa Management LP, which achieved a 117 percent return for the nine months ending Sept. 30th, taking the number one spot in Bloomberg Markets magazine’s Best Performing Funds report in its February 2010 edition.

Tepper achieved the top spot by scooping up beaten-down bank-related securities, such as common and preferred shares and junior subordinated debt of Bank of America, Citigroup, Fifth Third Bancorp and Sun Trust Banks Inc.  As the stocks surged later in 2009, Appaloosa pocketed more than $1 billion.

Tepper is profiled in a recent Businessweek article online, along with the heads of the other top-performing hedge funds of 2009. Tepper’s interest in investing started early, buying penny stocks in high school. He paid his way through the University of Pittsburgh, graduating with a degree in economics, by developing a system for options trading. Later, he was a star student at Carnegie Mellon University’s Graduate School of Industrial Administration.

After entry-level jobs in finance, Tepper wound up on Goldman Sachs’ new high-yield bond desk in 1985, the waning years of the junk bond heyday. By 1986, he was head of the junk-bond desk, but was passed over for partner three times as the high-yield bond market lost its luster in the wake of the Drexel Burnham Lambert Inc. collapse.

That disappointment pushed Tepper to launch his own fund, Appaloosa, in 1992, with $57 million in assets from people he knew through Goldman. The firm notched a 57 percent return in 1993 and grew to $800 million by 1996. Today, the firm has approximately $3.03 billion in assets among four funds. It’s a surprisingly lean operation, however, with just 11 investment professionals working at the firm.

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