William Ackman’s decision to finally throw in the towel on his Valeant Pharmaceuticals International investment after the embattled drug company’s stock helped to destroy his hedge funds’ performance is a painful reminder of the huge damage health care–related stocks have inflicted on many hedge funds, especially those that specialize in or have been heavily weighted toward the sector.
You can probably trace the start of the descent of many of these stocks to the summer of 2015, when then-presidential candidate Hillary Clinton railed at high prices for drugs, vowing to do something about it. That was about the time that the Valeant bubble started to burst, as its high prices were scrutinized and its accounting problems came to light. By April 2016, Congress was holding hearings over Valeant’s business practices.
The stocks were also hurt by the presidential election cycle in general, as investors were uncertain about potential health care reform as well as what kind of changes might be made to the Affordable Care Act and who would be hurt by them.
Larry Robbins’s Glenview Capital Partners, the flagship fund of his firm, Glenview Capital Management, lost more than 18 percent in 2015 and nearly 3 percent in 2016. For several years health care stocks have comprised most of the fund’s largest long positions. It is up 8 percent through February of this year, however.
Another fund that was hurt badly is the main fund managed by North Tide Capital, founded in 2010 by Conan Laughlin. He previously managed a health care–focused long-short portfolio for Israel (Izzy) Englander’s Millennium Management. North Tide specializes in health care services and medical technology stocks.
It has lost money for the past two years. It fell 16 percent in 2015 and another 3.15 percent in 2016.
Last year, however, could have been a lot worse for the fund. It was down 13.4 percent in the first half of 2016 but managed to shave off a little more than 10 percentage points of that loss by the end of the year, according to investors in the fund. North Tide not only lost money on a core group of long holdings, it also suffered losses from short bets against what one investor in the fund calls “safe” companies.
Yet one firm that has long specialized in health care stocks that didn’t seem to miss a beat during this rough period is New York–based Deerfield Management Co., probably the best-performing health care hedge fund manager over the past few years. After surging 30.4 percent in 2014, it posted gains of 11.7 percent and 8.63 percent in 2015 and 2016, respectively.
The firm was founded in 1994 by Arnold Snider, who was a Tiger Cub, having previously worked for Julian Robertson Jr.’s Tiger Management.
Snider retired in 2005 (he died in 2014), and the New York firm is currently headed by James Flynn, who has been with Deerfield since 2000. It is a rare successful succession story in the hedge fund industry.
According to its website, Deerfield manages more than $7 billion, but not all is believed to be invested in hedge funds. Investors in Deerfield credit the firm for its diversification and its resources. The firm would not comment.
The fund lost about 10 percent in the first quarter of 2016 but quickly gained it back in the second quarter and was flat at the halfway mark.
Deerfield is well diversified. At year-end its roughly $2.4 billion U.S. equity portfolio had about 100 different stock-related issues.
One stock that was a major holding last year — it was the largest long for three out of four quarters — was Horizon Pharma. Shares of the specialty pharmaceutical company dropped more than 25 percent in the first quarter of last year. The price fell another 2.4 percent over the remaining nine months, but in between it enjoyed brief surges.
Nxstage Medical, another top holding last year, fared much better. Shares of the medical device company that focuses on renal care were up about 17 percent last year. However, since the end of the first quarter — when the fund suffered a sharp loss — the stock has surged 75 percent.
AveXis, a clinical-stage gene therapy company, has been another major holding since the company went public on February 11, 2016. The stock was up 160 percent last year from its IPO price and is up 75 percent since the end of the first quarter. Meanwhile, shares of the British pharmaceutical company GW Pharmaceuticals surged about 60 percent last year and have gained a little more than 50 percent since the end of the first quarter.
The contrasting performance of these managers is just another example of the dangers of becoming married to one big bet in a concentrated portfolio.
