Hedge fund manager made $4B last year. And he deserved it

Amid loud and enthusiastic conversations about sports, politics and our favorite television shows, my extended family was feasting on a wonderful Easter meal prepared by my sister.
The bombshell, however, hit when my brother-in-law mentioned a story he read about how the top 25 hedge fund managers collectively earned more than $25 billion last year. One manager alone had earned $4 billion.
“What kind of crazy money is that?” he asked. “No one is worth that much money.”
Everyone, and I mean everyone, at the table started to weigh in about those “greedy bastards on Wall Street.” And being good Italians, the carefully reasoned arguments were accompanied by shouting and arm waving.
When I said: “That guy who earned $4 billion deserved every cent,” the silence that suddenly befell the table was like that in the old TV commercial when everyone stopped to hear what the client’s E.F. Hutton broker had recommended.
My family being my family, the silence lasted just seconds, and for the next few minutes, my mental capacity was loudly called into question.
I explained to the angry crowd that the $4 billion man was David Tepper, founder of Appaloosa Management LP. When investors worried that banks would collapse or that the government would nationalize them, he made a series of extremely bold bets by instructing his traders to buy up bank debt and stock.
Mr. Tepper knew what he was doing was risky, but he stuck to his guns. He believed that the government would stand behind banks, and put his money behind his beliefs.
That stance paid off for Mr. Tepper’s investors because his firm’s flagship fund gained more than 130% last year. That translated into a neat little profit of more than $7 billion for Appaloosa in 2009.
What’s more, Mr. Tepper reportedly noticed that investors were dumping their holdings of troubled bonds backed by commercial properties. Although he had never handled such investments, he and his 10-person team dug in, did the research and judged the bonds attractive.
Mr. Tepper took a big risk and won.
Robert F. Kennedy once said: “Only those who dare to fail greatly can ever achieve greatly.”
Even as other investors were fleeing financial stocks amid fears that banks would either collapse or be nationalized, Mr. Tepper had the guts to keep going.
“We bet on the country’s revival,” he said in a published report. “Those who keep their heads while others are panicking usually do well.”
Financial professionals know the drill: The bigger the risk, the greater the reward.
In Mr. Tepper’s case, while conventional wisdom was questioning whether the banks would even be around, he thought otherwise, made brave bets and won. He took the risk and therefore deserves the lucrative compensation.
Unlike corporate pay practices, the structure of hedge fund compensation makes it much more difficult for managers to make money while their investors are getting hammered.
Before hedge managers take their 20% of the spoils, their results must top the fund’s previous peak. Because just half of funds managed to get above this so-called high-water mark last year, according to Hedge Fund Research, the top earners, including Mr. Tepper, absolutely deserve to take home the big bucks.
This is clearly a case of pay for performance where the performance is there for all to see.
As I have written in previous columns, I embrace the free market, and I will never begrudge anyone’s success, financial or otherwise. In fact, I have always believed that success should be rewarded.
I don’t know whether I changed many minds at Easter dinner, but I rested my case with the family. We moved onto two safer discussion topics: the prospect of the Yankees’ winning another World Series, and my sister’s homemade desserts.

Related Topics: Just Thinking