My Kind of Manager

The name of this manager is David Tepper, founder of Appaloosa Management, who was written about in today's WSJ in the context of the Delphi reorganization . While I am mildly interested in the Delphi reorg I am very interested in David, specifically the attributes that make him both wildly successful and still wildly attractive as a manager even after running many billions of dollars and personally taking home over a billion of those dollars. This is not a normal state of nature and one I'd like to briefly comment on.

The fact of the matter is that, in general, when hedge fund managers become really successful one of two things happen:

1. They become increasingly risk-averse as a massive amount of their personal wealth is tied up in the fund, and they don't want to blow their nest egg by rolling the dice one more time; or
2. They become less interested in investing and more interested in other activities, i.e., politics, going back to school, collecting art, whatever, and take their eye off the ball.

Neither of these two things bode well for investors in the fund, who enjoyed the ride for a while but are now better off taking their chips off the table and switching to another hungry, young, super smart manager driven to produce outsided returns. We've seen this story again and again and again, and is also likely one of the reasons (others are mentioned here) why we see the push towards diversified multi-strategy platforms by "rock star" managers after reaching a certain scale. In most cases motives shift when managers reach the rarefied air of centi-millionaire and billionaire, and these motives frequently fall out of alignment with those of their investor constituencies.

So why am I so enamored of David Tepper? First of all, I have never met David but know people that know him who have given me some perspective on him as a person. He is supposedly a really great guy. Ok, that's nice, so what? Well, he has put up some huge numbers. Both positive and negative. His compounded returns are in the stratosphere, but the ride has been very, very rocky. This is the kind of manager that can drop 50% or be up 150%. Only certain kinds of investors can stomach this degree of volatility. One thing for sure, he is a purist. He knows what he knows and he does well what he does well, and this kind of strategy generates extremely volatile returns. So either accept this and live with it or get out. Again, this is my kind of manager.

But even more importantly, he is a man of massive means who lives like one of (relatively) modest means. He has certainly been very philanthropic, and I respect him a great deal for this. But while he could buy half of Greenwich, he is living modestly in New Jersey. So he is staying laser focused on the task at hand, working to make his admittedly complex strategy successful (at the intersection of securities valuation, corporate law and game theory) and generating eye-popping alpha for his investors (with the collateral benefit of generating eye-popping returns for himself and his capital). Just how focused is he? Well, not that long ago he returned $2 billion to his investors because he couldn't find a profitable way to deploy this capital. Say what? You mean he gave up management fees on $2 billion just because he couldn't find a profitable (or at least profitable up to his standards) way to invest it? Have you ever heard of such a thing? He didn't try and squeeze people out by raising fees. He just gave the money back. Simply astounding.

Now comes Delphi. He invested only $16 million to establish his 10% stake in the company and to secure his seat at the reorganization table. But now it's showtime, and to fully leverage his position in the reorganization he feels he needs the $2 billion back to play the way he wants. So now he asks his super-happy investors for the money back and presto, what happens? He raises the $2 billion in a nanosecond. Surprise, surprise. So, he couldn't use the money and didn't want to collect fees he shouldn't get and degrade returns he has worked so hard to build so he gave it back. Then when he really needs it because of a specific situation he asks for it and quickly gets it. Is there anything we can learn here?

This is the way to play the game - the right way. Here are some of the signs I can see based on my own experience and clearly exemplified by the founder of Appaloosa:

1. The manager runs a differentiated, pure strategy, and pursues it with laser focus, rigor and excellence
2. The manager takes in investors who really understand the nature of his expected returns and are comfortable with the place his strategy will live on the risk-return continuum
3. The manager lives well but is clearly less interested in money than he is in winning, which results in a clear alignment of motives between manager and investor
4. The manager has the confidence to manage the right amount of capital, and this amount may rise or fall depending on market conditions and/or specific investment opportunities
5. The manager is a good guy and a person of high integrity

Come on, am I asking too much here? One of the biggest problems, as usual, is with investors themselves. They often shudder at volatility they consider excessive, and will put pressure on a manager to reduce this lone metric even if it means the manager running a bastardized version of the strategy they are best suited to run. This is simply stupid and is an issue that should be dealt with in overall asset allocation, not single manager strategy. Investors will also frequently accept investing with complete jerks just because of pedigree. This is a short-term decision that may, in fact, come back to roost if problems emerge. Do you really want a manager whose principal refrain is "go f*ck yourself?" Hmmm - not me. Investors will also often want a manager to take more money than he should because they want to secure themselves as much capacity as possible, putting the manager in a hard situation (I mean, it is hard to turn away $1 billion of excess demand). I much prefer a system whereby the manager raises the amount of capital they can comfortably deploy running their pure strategy, and to go back to investors for more if they feel it can be efficiently and effectively invested. If it turns out to be too much, they can give it back. It is this back-and-forth that David Tepper has illustrated works in the real world that I think is so great for all parties involved.

Anyway, I do not frequently find myself a member of one's fan club but I kind of sound that way. I guess I am just royally frustrated with the poor behavior of so many managers and investors alike that when I see a guy doing the right thing and acting in the right way that receives the support of his investors, I just feel compelled to write about it. And this is what we have today with David Tepper. And I hope he makes a slew of cash in the Delphi restructuring. He deserves it.

Comments

[Roger]

Karim, thanks for the comment. You can learn more about me by checking out the About section on my blog. Best, Roger

[Karim]

I got drifted to your blog when I was trying to find Davis Tepper's email address on google. And im glad i got drifted to your blog. Enjoyed your insight about David Tepper. I see a great deal of similarity between him and Warren Buffett. Buffett (besides being astrnomically more successful) is all about proper capital allocation. He, too, lives a modest life and had returned the capital to his investors by liquidating his portfolio once. I aspire to be an investor like Warren Buffett one day. Hit me up at topgunstreet@gmail.com if you're interested. You've got a fascinating collection of book-list on ur blog.

Im 23 and have been working in Dallas, TX. Please tell me a little bit about yourself.

[howard Lindzon]

I see this all the time. Look at Vega and their spectacular returns.

As a busness, they were smart and diversified, but lately, investors that just stuck with them have been really diappointed.

Total loss of original focus.

Easy Fast