Tuesday, 7 August 2012

Specialist Manager Series - Selecting Healthcare Stocks with Rhenman & Partners

Selecting Healthcare  Stocks
Hedge Fund Insight” features a series of articles to share the expertise of specialist equity managers. The second looks at the approach taken by Rhenman & Partners Asset Management AB of Stockholm, which specialises in healthcare shares in the hedge fund format.
The requirements of institutional investors in hedge funds can be taxing. They can dictate the terms of business to a hedge fund; they can take nine months of exhaustive due diligence, and large investors have raised the bar across the industry in terms of the rigour of infrastructure and reporting standards they need.

Although survey evidence suggests that the largest American pension plans are considering investing in funds in the $500m-$1bn category, there is not much sign of the capital flows there yet. Investing with smaller, less-well resourced fund management companies will usually require a compromise on standards in some area for an institution. Why would a large insurance company or Endowment go to the bother of having to lay out the inevitable caveats in the proposal to the in-house investment committee?

The answer in one word is performance, in two words is alpha generation and in three words is pattern of return. Investing institutions need to tap into the higher return available from younger, smaller hedge funds, and for which academic studies provide good evidence. The security of management companies’ operating systems is a necessary hygiene factor in hedge fund investment programmes, but they do not justify the effort of investment consultants, funds of hedge funds, advisors, due diligence out-sourcing companies, third-party risk assessors and the dedicated internal investment professionals working on behalf of a state pension plan. Helping to meet the plan desired return target does.

One of the hedge fund investment strategies that give flexible utility to large investing institutions is sector long/short equity funds. The products of sector hedge fund managers can be used in core/non-core structures, in funds split along active/passive line, and where alpha generation is explicitly separated from beta exposures to markets/asset classes. A specialist technology long/short fund could augment a large cap or small cap allocation in a pension fund, or be a substitute within a number of domestic/global equity mandates. Also the investment processes of sector funds should be culturally acceptable to institutional investors as they are always dominated by the application of fundamental research, which meets the preferred bias of the big investors.

A good example is the Rhenman Healthcare Equity Long/Short Fund run by Rhenman & Partners Asset Management AB of Stockholm. Read on

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