First, the sector is driven by innovation, which can lead to above-average growth rates. Second, the sector is often less predictable and more volatile than other sectors, providing opportunities for active managers to generate alpha.
Third, many biotech companies are small and mid-sized cap stocks, which tend to be underfollowed by traditional institutional investors. This can provide a great opportunity for hedge funds that are able to conduct in-depth research on these companies.
Fourth, the healthcare sector in general has been a outperformer in recent years, as importance of health care services continue to grow globally.
Finally, the regulatory environment for biotech companies is changing rapidly, providing both challenges and opportunities for experienced investors.
All of these factors have contributed to strong performance for hedge funds investing in biotech. According to data from Bloomberg, the average healthcare hedge fund was up 13.2% in 2016, while the S&P 500 Healthcare Index gained 9.5%.
For the year-to-date period through August 2017, healthcare hedge funds were up an average of 7.4%, compared to a gain of 5.6% for the index.
Given all of these positives, it’s no wonder that more and more hedge fund managers are turning their attention to biotech stocks. If you’re thinking about adding some biotech exposure to your portfolio, here are five top picks from leading healthcare hedge funds.
Intrexon Corporation (XON)
Intrexon is a biotech company that focuses on the development of synthetic biology solutions. The company’s technology platform can be used in a wide range of applications, including health, food, energy, and the environment.
Intrexon shares were up almost 50% in 2016 as investors began to realize the potential of the company’s technology platform.
That trend has continued in 2017, with shares up another 30% so far this year. The stock is now one of the top holdings for several leading healthcare hedge funds, including Deerfield Management and Orbimed Advisors.
Five Prime Therapeutics, Inc. (FPRX)
Five Prime is a clinical-stage biotech company that’s focused on developing immuno-oncology and inflammatory therapeutics.
The company has a number of promising drugs in its pipeline, including Bempegaldewa, which is currently in Phase III trials for the treatment of gastric cancer. In August, Five Prime announced positive results from a Phase I/II trial of its lead drug candidate Cabiralizumab in patients with advanced solid tumors.
On the back of these positive clinical data, shares of Five Prime have surged more than 50% so far in 2017. The stock is now one of the top 10 holdings for several healthcare hedge funds, including HPM Partners and Venrock Healthcare Capital Partners.
Atomera Incorporated (ATOM)
Atomera is a semiconductor materials science company that’s developed a unique technology called Mears Silicon Technology (MST). MST can significantly improve transistor performance in next-generation digital devices such as computers, smartphones, and tablets.
Atomera has already licenced MST to several major semiconductor companies and is working on commercializing the technology itself.
After a slow start to 2017, shares of Atomera have surged more than 90% so far in the second half of the year. The stock is now a top 10 holding for several leading healthcare hedge funds, including RA Capital Management and Rock Springs Capital Management.
Bluebird Bio Inc (BLUE)
Bluebird Bio is a clinical-stage biotech company that’s focused on developing transformational therapies for patients with severe genetic diseases and cancer. The company has two lead drug candidates in clinical trials: LentiGlobin, which is being tested as a treatment for beta thalassemia and sickle cell disease; and bb2121, which is being studied as a potential therapy for multiple myeloma.
In August, bluebird announced positive results from a Phase I/II trial of bb2121 in patients with relapsed or refractory multiple myeloma. Shares surged on the news and are up almost 30% so far in 2017.
The stock is now one of the top 10 holdings for several leading healthcare hedge funds, including RA Capital Management and Deerfield Management.
Aerie Pharmaceuticals Inc (AERI)
Aerie Pharmaceuticals is a clinical-stage biotech company that’s focused on the development of therapies for the treatment of glaucoma and other eye diseases. The company’s lead drug candidate, Rhopressa, is currently in Phase III trials for the treatment of primary open-angle glaucoma.
In September, Aerie announced positive results from a Phase IIb trial of Rhopressa in patients with moderate-to-severe primary open-angle glaucoma. Shares surged on the news and are up more than 60% so far in 2017.
The stock is now one of the top 10 holdings for several leading healthcare hedge funds, including Deerfield Management and HPM Partners.
Investing in general is volatile and this article should not be considered as a financial advice. Only sophisticated investors who understand the risks that come with the activity should be investing.
Investing in biotech can be extremely beneficial for hedge funds. The sector is driven by innovation, provides opportunities for active managers to generate alpha, and many biotech companies are small and mid-sized cap stocks that are underfollowed by traditional institutional investors.
Additionally, the healthcare sector in general has been a outperformer in recent years, making it an attractive investment option for hedge funds.