Think the markets are scary and uncertain? Well, you’re not the only one. Even some of the savviest players are baffled about what is going on and have therefore turned very cautious.
Case in point: Appaloosa Management’s David Tepper. Yes, the hedge fund manager who has ice-water in his veins and who likes to ride roller-coasters with his hands in the air, has turned cautious.
Sources say he has gone 30 percent to 40 percent in cash, which is very high for him. Some of his cash is invested in U.S. Treasuries, which have in turn risen in value in recent weeks.
Keep in mind that Tepper had about 30 percent in cash entering 2009, shortly before he started buying up banks such as Bank of America before anyone else had the guts to do the same and racked up triple-digit gains by the end of the year.
Sources say he is not preparing to aggressively start spending this cash any time soon, except to pick up some shares of stocks he already owns on the dips.
If you recall, last September Tepper helped to touch off a market rally when he offered his famous win-win analysis on CNBC, asserting stocks would either do well if the economy strengthened or with government stimulus.
When this year started his portfolio was primed for a blow-up, given the subsequent collapse in financials. His three largest holdings were Wells Fargo — including a big position in preferred stock — Citigroup and Bank of America. However, he began selling those stakes aggressively in the first quarter and continued to do so in the second quarter. By the end of June, his Citi stake was a small fraction of what it was at the start of the year, although it was still his third largest holding. However, in the first quarter he sold his Wells preferreds and by the end of the second quarter his common stock stake was less than half. His Bank of America position was down 60 percent.
John Paulson also had a big exposure to financials at the beginning of the year. Although he trimmed them in the first half, at the end of June four of them still ranked among his nine largest holdings—Citi, Capital One, Wells Fargo and Hartford Financial Services Group.
As a result, at the end of August, all of his funds were way down for the year — in one case as much as 35 percent or so. Tepper, however, is said to be flat to down a point or two.
Sources say Tepper is not eager to take an outsized risk and wind up down 25 percent even though when this happened on two previous occasions, he followed those big losses with a triple-digit gain the following year.
Word is he will remain cautious until there is improvement in the European bank crisis. Of course, if the markets tank, you can be sure he’ll be aggressively scouring for bargains.
And, remember Tepper has historically been the one who has had the most guts to buy when absolutely no one else has the stomach to tolerate it.
Tepper is not the only high profile manager to bring down risk. A well known-long short manager several weeks ago confirmed he was “de-risking,” bringing down his net exposure.
Adds an investment advisor with a large portfolio of hedge funds: “We can’t have a bottom until Europe gets worked out.”
