Healthy hedges for a new equity era

This past week was a bit of mixed bag for earnings for pharmaceutical companies, with giant Pfizer beating estimates as a large efficacy study starting with up to 30,000 participants for its coronavirus vaccine. Lilly had mixed results, while Sanofi beat earnings estimates. Biotech/healthcare-oriented hedge funds historically have been a mixed bag too. In 2019, many of these sector hedge funds reported large double-digit gains and some stumbled in the first half of 2020. And now as the global health emergency continues to ramp up, this return dispersion seems to be attracting the attention of investors. This past month, Lillian Knight, managing director of fund of hedge funds K2 Advisors, offered her insights exclusively to Alternatives Watch. “Sector focused managers within technology and healthcare are also attractive to us -- these two sectors that historically have had wide dispersion, and we expect will have even more dispersion moving forward,” she wrote. She even provided prime examples of losing segments in the space due to COVID-19 including hospitals, global supply chain and generics. The HFRI Healthcare hedge fund index was up a whopping 15.81% in the second quarter and for the year-to-date is up over 4% through June -- showcasing the volatility in the equity hedge fund strategy. According the Chicago-research firm, the 2019 returns by healthcare hedge funds were nearly 20% as assets under management in the equity long/short funds hit a record $973 billion. Still, not all strategies are created equal. For instance, biotech specialist Perceptive Life Sciences reported year-to-date losses of 1% through July 24, according to HSBC figures. This follows 2019’s stellar gains of 52%.A smaller and newer fund founded in 2012, Jenop Global Healthcare, reported year-to-date gains through July 14 of nearly 17%. Another long/short hedge fund, NicHealth, reported second-quarter gains of 27% and 8.7% for the year-to-date through June. Officials said that returns from the long positions was positive, driven by performance in both therapeutic segment (biotech and pharma) and non-therapeutic holdings. Nicholas Investment Partners as a firm operates as a boutique focused on less efficient markets such as U.S. small- and mid-cap equities and convertible bonds. Specifically, the firm’s $100 million-plus healthcare strategy focuses on biotechnology, medical technology and digital health. “Despite the market’s exuberance, we felt caution was warranted as the U.S. faced uncertainties from a re-acceleration of coronavirus cases and renewed shutdowns,” wrote Lisa Wheatley, partner and portfolio manager for NicHealth, in a letter to investors obtained by Alternatives Watch. She added that there were clear medium-term beneficiaries of the pandemic, but still a number of high-multiple industries in sub-sectors such as those reliant on hospital procedures, where there is still ‘clouded visibility,’ she said. In this area the firm had reduced exposure in February. One of the fund’s successful holdings was Livongo, which is a subscription-based digital health company that supports patients with chronic conditions such as diabetes. Wheatley said that adoption curves for remote monitoring have been pulled forward during COVID-19 and are part of a lasting trend. In the second half of 2020, Nicholas is looking for Phase 3 vaccine results and how it will impact the broader economy and fund flows. “While we don’t think vaccine is a winner-take-all scenario, we do think there is substantial deflation in store for some for the newly minted vaccine developers,” she wrote in her commentary to investors.

Healthy hedges for a new equity era

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