Page 254

In September 2000, only 4 percent of the portfolio was in non-U.S. instruments.

Tepper acknowledges a major vulnerability to his approach. "You can't stay too long in such situations. You are fighting on a micro level and it's not your battlefield." He then brings the conversation back to junk bonds and distressed securities—which are his battlefield and what he knows best.

Tepper admits that it is hard to hedge distressed securities, junk bonds, and emerging markets. They tend to use S&P futures and Treasuries. "It is an art, not a science, and the percentage moves around. We may not have a hedge on if we are really bullish."

The Appaloosa portfolio has not used leverage in two years. The high had been 3:1. One example of high leverage was its buying Columbia Gas investment-grade bonds where the yield was 600 basis points over Treasury bills and relatively little risk. If it is a safe, lower-volatility asset such as Columbia Gas or McDermott bonds, Appaloosa feels comfortable adding more leverage. The typical leverage, however, is about 1.5:1 to 2:1. In Thoroughbred Fund, a secured bank debt fund, leverage of 4:1 to 7:1 is used.

THREE-YEAR LOCK-UP

At the end of 1998, Tepper says investor withdrawals were normal. This is partly because many of the investors are long-term in nature and had been with him for a while, and performance had been excellent. He also requires a three-year lock-up of assets.

Because of the three-year lock-up, he does not have many fund of funds investors or European investors. Clients tend to be endowments, family offices, and high-net-worth investors. According to the 1999 NACUBO study, Davidson College and Middlebury College are two endowments that allocate to him. Overall, there are about 150 investors.

Regarding transparency, he gives investors the investments by category on a quarterly basis. He lists the percentage in U.S. stocks, the emerging markets by country, as well as stock investments by country. But he does not provide individual names.

All the funds are named after horses. Appaloosa Investment LP I is for U.S. investors; Palomino Fund Ltd., which invests in parallel to Appaloosa, is for non-U.S.; and Thoroughbred LP I is a secured bank