Appaloosa’s David Tepper Is Getting Nervous about the Market

The top-earning hedge fund manager in the world, who was bullish on stocks six months ago, advises investors to be cautious now.

Key Speakers At The Robin Hood Foundation Investors Forum

David Tepper, president of Appaloosa Management LP, speaks during television interview at the Robin Hood investors conference in New York, on Thursday, Nov. 21, 2013. Tepper said stock markets are not inflated as economies in the U.S., Europe and China are on “firm ground.” Photographer: Peter Foley/Bloomberg *** Local Caption *** David Tepper

Peter Foley/Bloomberg

David Tepper has a message for investors: The markets are extremely challenging, and now is not the time to be aggressive.

“It’s nervous time,” said the plain-spoken hedge fund manager, speaking yesterday at the Skybridge Alternatives Conference, known as SALT, the glitzy hedge fund industry confab held annually at the Bellagio Hotel in Las Vegas. “You should probably be long but you should have some cash. I’m not saying go short, I’m just saying don’t be too frickin’ long.”

Tepper, founder of the $19.3 billion, Short Hills, New Jersey–based Appaloosa Management, was by no means the only hedge fund insider speaking on Wednesday to sound less than optimistic, but coming from him the message carried additional weight. For one thing, when Tepper talks, people listen. That’s because he is one of few hedge fund managers operating today who lives up to the industry’s early promise of consistently generating outsize returns. His investment record is hard to beat: $1 million invested with Appaloosa at its July 1993 inception date would be worth an astonishing $181 million today. Tepper recently topped the Institutional Investor’s Alpha Rich List of the highest-earning hedge fund managers, taking home a cool $3.5 billion in 2013 after his firm’s Appaloosa Investment I and Palomino funds returned 42 percent. (Palomino was up 1.26 percent for the first three months of this year.)

The remarks also signal a shift in Tepper’s thinking. As recently as November, Tepper told investors at another conference that he predicted the stock market would be higher in six months and that any talk of a stock-market bubble was premature. At the time, Tepper said investors couldn’t go wrong buying index funds or exchange-traded funds that were long the market.

So what’s causing Tepper, who has consistently been one of the more optimistic hedge fund managers of the past few years, to turn cautious? He says he is concerned about the U.S. gross domestic product’s rate of growth, which he believes should be improving faster. Tepper thinks the poor first quarter numbers will probably be revised upward, but he says it’s troublesome that GDP growth is not approaching 3.5 percent. He also is worried that the European Central Bank is not acting fast enough to implement quantitative easing measures.

While Tepper says the U.S. stock market is “okay” for now, investors should be more focused on not losing money than making money. Slowing growth spells lower profits, in his estimation, and the environment is mixed due to what his firm calls “coordinated complacency.” In other words, central banks around the world are afraid to make moves to stimulate growth for fear of roiling the markets.

But the talk wasn’t all gloom and doom. Tepper gleefully peppered his comments with colorful expletives and revealing anecdotes about his career. Tepper, who headed up the junk bond trading desk at Goldman, Sachs & Co. before starting Appaloosa, said that after he was famously turned down for a partnership at the firm for the third time in a row, “I said screw that shit, I’m going to try to start a hedge fund.” Later, when discussing his charitable activities — which have included keeping various food banks afloat after both the financial crisis of 2008–’09 and Superstorm Sandy in 2012 — Skybridge Capital founder Anthony Scaramucci asked Tepper if he believed in karma. “Are you fucking kidding me?” he replied. “Of course I believe in that shit.”

Tepper also regaled the audience with the story of why he chose the name Appaloosa for his firm. “At the time we started the fund, information was sent out by faxes,” he explained. “If you were at the beginning of the alphabet you got the info ten minutes faster.” He had originally wanted to call the firm Pegasus, as Greek titles were popular at the time, but the name was already taken.

With his firm’s conistently high returns, it’s no wonder that investors are clamoring to get into Appaloosa. But Tepper, who embodies old-school hedge fund management — make big bets, earn big money and don’t worry about looking institutional — has returned capital to investors and says he has no interest in taking in more assets. “We made a decision that I am investing more for high returns than collecting assets, and that’s what we want to do,” said Tepper. “I love the game. I love winning the game.”

Tepper said that over the years Appaloosa has also scaled back its activities, scrapping funds that invested in loans and mortgages because he felt the firm was getting too complex to manage, which detracted from its performance. These days Tepper is focused on continuing his firm’s remarkable run, noting in his characteristically blunt fashion that Appaloosa has given its investors back two times their initial allocation into the firm: “I like most of my investors — I don’t like them all — but when you give them back twice what they invest, it’s a great burden off your shoulders.”