Billionaire hedge fund manager David Tepper said the prospect of tariffs on China is among the biggest risks to the current market.

He said stocks could drop 5 percent to 20 percent if trade tensions between the world's two largest economies increase.

“To me the markets are fairly valued if you don’t have tariffs on China,” the founder of Appaloosa Management said in an CNBC interview Thursday. “If you do, the question is how high the dollar will go,” he said.

Tepper said his hedge fund reduced its stock holdings by about 30 percent, leaving it with about 25 percent exposure. “Fair value doesn’t mean you can’t go higher, it just means you have to be cautious,” he said.

The money manager said that while he’s not a fan of tariffs in general, the U.S. has to act if China is stealing its technology.

Tepper said he still likes Facebook Inc., as the stock is cheap at current levels, although he isn’t as enthusiastic about the social-network company as he was before. He also said he remains bullish on Micron Technology Inc., which has become a larger part of his portfolio after he cut other positions.

On Micron, he said:

• The stock looks good from the demand side, which is going to be a positive for a “long time” because of smart cars and cloud technology
• He’s confident in new management, and is still “very, very long”
• “Sticking with it” despite challenges

On Facebook:

• Stock still trades 16 to 17 times next year’s earnings