Opportunities in health-care investing through hedge funds, private equity funds and long-only equity strategies seem to be drawing increasing interest from institutional investors. But not all areas of the sector are flourishing.
One indicator of the interest is the growth of U.S. health-care mutual funds for institutional investors over the last 12 months. According to Morningstar, total net assets for those funds have increased to $1.8 billion as of May 31, up from $1.2 billion as of Nov. 30, 2012, and from $1 billion as of June 30, 2012.
Institutional investors are very interested in the health-care sector now, especially because of excellent returns in health-care subsectors, including the stocks of drug manufacturers, insurance companies and providers, said Roderick Wong chief investment officer and managing partner of RTW Investments LLC, a health-care hedge fund firm in New York with $60 million in assets under management. For some sectors, the returns are about 20% so far in 2013, Mr. Wong said.
RTW's offshore fund (RTW Master Fund Ltd.) was up 26.8% for 2013 through June and up 21.9% for 2012, both net of fees, according to the firm.
The HFRI EH: Sector — Technology/Healthcare Index is up 8.92% for 2013 through June. In comparison, the HFRI Fund Weighted Composite Index is up 3.55% for the same period.
Health-care reform also is driving institutional investor interest in the space, Mr. Wong said. The Affordable Healthcare Act will add up to 30 million people to the insured rolls. The ACA is “clearly a short- and medium-term net positive for many players in health care,” Mr. Wong said.
Carter Neild, a general partner at health-care investment firm OrbiMed Advisors LLC, New York, said he sees institutional investor interest in the health-care sector driven more by innovation in the industry and drug launches, and less by the ACA changes. Last year, for example, the U.S. Food and Drug Administration approved 39 new drugs, a 15-year high.
OrbiMed is considered the largest health-care investment manager in the world, with about $7 billion under management. That includes about $2.5 billion in hedge funds, $2.5 billion in long-only equity funds, $1.5 billion in private equity funds and $500 million in health-care royalty funds.
Within health care, investor interest has varied according to wide disparities in returns. Royalty funds, the illiquid investment vehicles that monetize royalties for drugs or medical devices, are “white hot” and wildly oversubscribed because they provide great returns and steady cash flow in a low/no-interest environment, Mr. Neild said. And only a handful of health care royalty fund managers exist, including OrbiMed, DRI Capital Corp. of Toronto, Royalty HealthCare Partners of Stamford, Conn., Capital Royalty L.P. of Houston and Royalty Pharma of New York.