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fund profile The investment team attends major therapeutic conferences and frequently reviews relevant scientific literature and journals to keep abreast of developments and find the companies most likely to be the target of attention on either the long or short side of the portfolio. Expertise and research Despite these considerable challenges, OrbiMed believes it has put together a winning formula. Its investment team includes over 30 professionals exclusively focused on the healthcare sector. Its activities cover the whole gamut of healthcare investments across all major geographies, sub-sectors and company stages. Strategy According to Neild, the company pursues a simple (in concept) strategy. OrbiMed seeks long investments in companies pursuing novel therapeutics that will be successfully commercialised and generate meaningful revenues. On the short side OrbiMed seeks companies pursuing therapies that will fail in clinical trials or suffer disappointing commercial launches. The process is driven by intensive proprietary research. The company takes a worldwide perspective to find the best opportunities globally and complements the investment process with a rigorous set of risk management protocols. According to Neild, OrbiMed has an edge over other funds because its large team gives it the ability to gain more extensive coverage of scientific and medical news. Close contact The investment team attends major therapeutic conferences and frequently reviews relevant scientific literature and journals to keep abreast of developments and find the companies most likely to be the target of attention on either the long or short side of the portfolio. The team has developed wide networks and relationships with independent medical consultants. In addition, it carries out surveys with physicians to identify trends and new areas of research. In a typical year, investment professionals from OrbiMed will meet with management team members at upwards of 90% of the companies in their sector. They also work closely with the private equity team to leverage relationships with venture capital stage companies. OrbiMed has access to agency and policy maker views on important drugs, speaking with, for example, current and former employees of the US Federal Drug Administration. To facilitate its global research efforts, OrbiMed has team members based in New York, Mumbai and Shanghai. Portfolio construction Portfolio construction is disciplined and research-intensive. From a list of 750 public companies (including 500 US), analysts screen out the middle 350 as neither good enough to buy nor bad enough to short. An analyst typically looks at 50 stocks. From the 400 companies remaining on the active list, fair value estimates and valuation screens are created. Analysts meet with the management of each company at least once a year. From this process another 200 companies are dropped as they are seen to have no catalyst for an investment thesis. The remaining 200 names are studied intensively. Detailed business forecasts and research are undertaken, including frequent discussion with company management. Analysts working in conjuction with the two senior portfolio managers make a final selection of long and short best ideas on a global basis. Typically the portfolio holds 35 core long and 20 short positions. A typical mix of positions contains 15 profitable companies, 20 emerging companies and 20 short positions. There are daily investment meetings to discuss the portfolio. As with any hedge fund, risk management is a serious issue. Bottom-up stock selection emphasises companies where risk factors and correlations are well understood. Net market exposure averages 60%–70% but is adjusted dynamically in response to changing market conditions. Diversification The portfolio is diversified. It is typically made up of a selection of the big name pharmaceutical companies, smaller specialty pharmaceutical companies, generic drug makers, medical device manufacturers and mature and emerging biotechnology. Exposures are a mix of North America, Europe and Asia. Position sizes are limited for individual equities. Large-cap companies are typically sized at 4%–7%, mid and small caps at 2%–4% and with short sales at 1%–3%. more biotechs achieving profitability Number of profitable biotechs 120 100 80 60 40 20 0 Acquired Independent Source: OrbiMed Advisors Some additional strategies which are non-correlated to equities complement the core long/short equity book, including an options overlay strategy and a dedicated effort to acquire pharmaceutical royalty streams. Al Safi link OrbiMed has a long-term strategic interest in the Middle East. Neild expects opportunities in pharmaceuticals and healthcare services to be attractive to investors in the region. He believes the way OrbiMed constructs its funds will require little change to make them Shariah compliant. “The nature of the healthcare companies we focus on means they are not leveraged or have a lot of debt. We would not expect to have to change the way we run the protfolio in any meaningful way,” concludes Neild. After an initial approach from Barclays Capital, the due diligence process has begun on both sides “We see real opportunities to work with Barclays in a strategic partnership. We’ve been to the region several times and expect over time to establish a permanent presence in the Middle East,” Neild explains. n • 73 biotechnology and emerging drug discovery companies have reached profitability through 2007 (including 39 companies acquired) • Another 32 companies are anticipated to overcome ‘accidents’ to achieve profitability by 2009 • Profitability —> broadens investor base —> increases valuations and liquidity 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Estimate 32 | Access to Islamic Hedge Funds Supplement | November 2008 www.hedgefundsreview.com
strategy profile Investment approach based on deep research is key to Alkeon Sticking to your strategy and maintaining risk parameters is essential, particularly during a dislocated market. This is the view of Panayotis ‘Takis’ Sparaggis, president and chief investment officer of Alkeon Capital Management. The company was founded after Sparaggis exited CIBC Oppenheimer with his team that had been running a global long/short growth equity hedge fund. The split was friendly, says Sparaggis, and has resulted in a highly cohesive team. This should come as no surprise, given the collective experience of the team, most of whom have been involved in the investment management industry for more than a decade. Sparaggis has been managing various hedge fund strategies since the early 1990s, initially at Credit Suisse First Boston Asset Management and then at Oppenheimer, where he started a global long/ short growth strategy as a proprietary account. He set up Alkeon to follow the same intensive investment process he followed at Oppenheimer. The company is named after the African seabird, Alkyonis, which is usually seen in January and February as a harbinger of spring in Greece (where Sparaggis was born), bringing with it warm winds. Like the bird, Alkeon has been able to give good news to investors. He says the company has received net inflows in recent months as investors perceived the strategy as one focused on maintaining value and discipline. The global long/short equity strategy which Sparaggis started managing in January 1998, is growth orientated. The research is bottom-up and focuses on all growth sectors, countries and market capitalisations. Sparaggis neatly sums up the style by explaining the approach is “really a private buyer’s perspective. We look at a business and the question we ask is, is this a company where we would put our own money? If the answer is ‘yes’ we look at the price and other fundamentals,” he explains. The portfolio aims to be a collection of “great assets” says Sparaggis. The challenge of finding good companies and producing double alpha – by this Sparaggis means producing alpha on both the long and short side of the portfolio – is what makes him get out of bed in the morning. “I really like this business,” he admits. The only sectors Alkeon avoids are oil, metals, mining and commodities. Sparaggis does not believe the team’s strength lies in these areas www.hedgefundsreview.com November 2008 | Access to Islamic Hedge Funds Supplement | 33
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