Access to Islamic Hedge Funds - Incisive Media

fund profile
Western
populations are
on average ageing
rapidly, with the
proportion of the
population aged 65
and over expected
to increase by 50%
or more in most
western countries
over the coming
decades.
demographic story, as its elderly
population is expected to double by
2025, thanks partly to the controversial
“one child” policy.
Innovation is a second key growth
driver. New markets are created
over time thanks to the ineluctable
progress being made in the scientific
understanding of human diseases.
Innovative new drugs and treatments
inevitably flow from this
greater understanding of disease.
For instance, the recently launched
vaccines for the human papillomavirus
are poised to effectively
prevent the vast majority of future
cases of cervical cancer.
There are over 1,000 such potentially
promising products in the
drug industry pipeline currently
under review by OrbiMed. OrbiMed
believes the future is particularly
bright for the biotechnology sector
as more biotechnology companies
are becoming profitable.
A total of 73 biotechnology and
emerging drug discovery companies
(including acquisitions) had
attained profitability as of 2007 and
a further 32 companies are expected
to achieve profitability by the end of
2009.
Growth drivers
The final growth driver for the
healthcare sector is the trend
towards rising global affluence. A
disproportionate share of income
growth tends to be spent on healthcare
as the newly minted middle
classes in many countries begin
to demand quality western-style
healthcare.
This is particularly true in China
and India where there is a rapidly
growing middle class demanding
better medical care.
China’s pharmaceutical market
is growing two to four times faster
than western markets. Emerging
markets overall account for more
than one third of recent pharmaceutical
growth.
These factors lead OrbiMed to
believe that investing in healthcare
now is a compelling opportunity.
Historically low valuations and noncyclical
growth companies coupled
with rampant merger and acquisition
activity creates an attractive
entry point for investors today.
Pharmaceutical and biotechnology
companies have generally
underperformed the broader
markets by a cumulative margin
of 25%–40% over the past six or
seven years, according to Neild. As
a result, valuations for larger biotechnology
companies are now near
historical lows by measures such as
price/earnings ratios and price/sales
ratios.
Non-cyclical growth opportunities,
such as healthcare companies,
have often rotated into favour
during previous economic recessionary
environments.
For example, the Amex Biotechnology
Index increased 46% in 1990
and over 190% in 1991, a period
similar to today’s economic environment.
Merger and acquisition activity
is strong. The large pharmaceutical
companies need to pay high prices
for biotechnology acquisitions.
A dozen significant acquisitions
have been announced in the past few
months, including a $7 billion offer
for Imclone Systems from Eli Lilly
and a $44 billion offer for Genentech
from Roche.
Lack of competition
The business of investment in the
healthcare sector has become far
less competitive over the past few
years thanks to a significant amount
of attrition among the group of specialist
hedge funds focused on the
healthcare sector.
Less competition provides the
survivors, such as OrbiMed, with
greater market inefficiencies and
less competition for new ideas.
For all these reasons Neild
believes that OrbiMed’s long/short
specialist healthcare fund, Caduceus
Capital, will continue to prosper
as it has over the past 15 years.
Neild believes a long/short equity
strategy has significant advantages
in making healthcare investments
that are not available to a long-only
static approach.
Wide dispersion
First, there is a wide dispersion of
returns for companies within the
biotechnology and pharmaceutical
sectors because these companies
generally have a ‘binary’ nature
to their development. Either their
therapies work, and the stocks go
up, or the therapies fail along with
the stocks.
A long/short equity fund can
make money from either type of
outcome and is not solely depending
on playing the ‘winners’.
Additional, the ability to manage
tactically net market exposure is
also advantageous in the healthcare
sector, as volatility, particularly for
biotechnology stocks, can be high.
The impact of investor sentiment
changes and retail investor money
flows combine to create high volatility
and frequently over-bought or
over-sold market conditions.
A long/short equity fund is
capable of altering net market exposure
in response to these market
cycles in order to seek additional
alpha generation possibilities.
But this sector is not to be entered
lightly through generalist funds
who lack deep scientific and medical
research experience.
The highly technical nature of
analysis of emerging drug and
medical device products requires a
highly specialised research team.
percentage of population over 65
biotech healthline healthy and growing
30
%
25
2000
2025
1,200
1,000
Phase 1/Iia
Phase 1I/III or III
20
800
15
600
10
400
5
200
0
Source: United Nations
UK Japan US China
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: Goldman, Sachs & Co
www.hedgefundsreview.com November 2008 | Access to Islamic Hedge Funds Supplement | 31