Healthcare Likely To Drive Hedge Funds To The Top Yet Again?

Healthcare has been the top choice of hedge funds this year again. While every investor might not be charmed by the sector, those who have invested there have made historical gains in some popular stocks. Recently Columbus Circle Investors upped its investment in its healthcare-focused fund, saying that the sector is likely to get a boost from the Supreme Court’s decision to uphold Obama’s healthcare law.  CCI Healthcare Partners is up 4.7% for the year; the fund manages $1.3 billion. CCI Micro Healthcare Partners, which manages just $65 million, is up 11.4% in the same period.

CCI’s Oliver Marti said he expects positive price action in shares of HCA Holdings Inc (NYSE:HCA) Holdings, Universal Health Services, and Tenet Healthcare Corp (NYSE:THC). The companies that CCI Healthcare Partners is bullish on are those that brought glory to Larry Robbins’ Glenview Capital in the past years. Glenview Capital Partners was up 6.8% for the year through the end of May after a few tough months in the beginning of the year.

Perceptive Life Sciences traps a 35% return YTD

Joseph Edelman’s Perceptive Life Sciences fund made a spectacular gain for itself even before the first half of the year ended. Returns from HSBC Hedge Weekly show that the biotech-focused fund was up 34.4% for the year through June 19. Edelman has done exceptionally well with consistently good performance over past years with an annualized return of 20.5%. The fund returned 20.3%, 44% and 27.5% in the years 2014, 2013 and 2012 respectively.

In April, Perceptive invested in startup MyoKardia, which plans to develop small-molecule pills for patients with mutations that can trigger heart disease. Another winning investment of Joseph Edelman has been Neurocrine Biosciences, a pharmaceutical company focusing on neurological and endocrine disorders. Shares of the company are up 110% YTD.

Other healthcare-focused Hedge Funds have also done well this year. The $116 million Visium Institutional partners was up 10.23% for the year through June 19. Visium’s pharma- and biotech-focused fund, Visium Balanced Fund, is up 9.7% YTD. The flagship fund manages $3.35 billion. The $232 million JENOP Global Healthcare fund has also gained, rising 10.3% through June 12.

Healthcare expected to bag highest earnings growth in 2015 amid flurry of M&As

Among the HFRX Equity Hedge indices, the Technology/Healthcare index gained 5.4% YTD through the end of May. This is better than the 2.3% return on the broader HFRX Equity Hedge index. Meanwhile an analysis of U.S. equity strategies from Morgan Stanley (NYSE:MS) shows that the Healthcare sector is expected to bring the highest earnings growth this year at 11.1%

According to Morgan Stanley’s Acquisition Likelihood Estimate Ranking Tool (ALERT), the Healthcare sector is also likely to experience the most rigorous M&A activity. Healthcare had the largest number of companies with the highest likelihood of receiving offers, ALERT’s results indicated.

In a recent report from BAML which discussed healthcare investment grade credits, the analysts said prospects are bright in this sector. The report also said that M&A activity, specifically unsolicited buyout offers, are likely to continue over the summer. While commenting on the attractiveness of healthcare companies as investments, BAML said:

“With strong balance sheets, solid pipelines and growth prospects, healthcare names offer good investment opportunities after a levering up event has occurred and debt pay down begins. New issuance would be a good entry point to gain exposure.”

Most popular stocks in the hedge fund industry

While there are different views on whether hedge funds increased or reduced allocations to the healthcare sector in Q1, the overweighting of these investors in some big names is undeniable. Actavis plc (NYSE:ACT) has reigned in hedge fund portfolios for over an year now. Its investors were excited as a $67 billion deal was inked to finalize the buyout of Allergan by Actavis. At the end of Q1, 77 funds held Actavis in their top ten holdings, according to data from Goldman Sachs Group Inc (NYSE:GS)’ quarterly hedge fund trend monitor, making it the top choice of hedge funds. The pharmaceutical company was owned by Bill Ackman‘s Pershing Square, John Paulson, Andreas Halvorsen’s Viking Global, Dan Loeb‘s Third Point and Steve Mandel‘s Lone Pine Capital.

Other popular hedge fund holdings include Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX) Pharmaceuticals, Gilead Sciences, Johnson & Johnson, Pfizer, and Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) Industries.

With expectations of strong earnings growth and M&A action in the sector, it seems healthcare stocks will again crown winners in the hedge fund industry this year.