John Paulson’s healthcare fund was launched mid-June of 2015 but less than three years on and the axe has fallen on John Paulson’s healthcare fund.
In the first quarter of 2018, a number of employees of the once-mammoth Paulson & Co. were let go amid years of poor performance. Headcount reductions were made across the board and included key veterans who have been employed by John Paulson for more than 10 years.
“the axe has fallen on John Paulson’s healthcare fund”
John Paulson’s healthcare fund had made outsize bets in the healthcare market since its inception in 2015
John Paulson’s healthcare fund was particularly weighted towards the pharma sector with large holdings in companies like Valeant Pharmaceuticals, which had turned out to be a money black-hole for many hedge funds.
Indeed, the Valeant meltdown and Wall Street’s drug problem sheds light on the company’s downfall.
In short, Valeant is under investigation for extortionate pricing.
“Syprine, which can be had for $1 a pill in some countries, now has a list price of around $300,000 for a year’s supply in the US.”
So John Paulson, the billionaire investor who had once managed a massive $37 billion in 2011 due to well-timed bets against the housing market in the lead-up to the 2008 financial crisis, is struggling to replicate his prior successes.
“Syprine, which can be had for $1 a pill in some countries, now has a list price of around $300,000 for a year’s supply in the US”
But could fortunes change for John Paulson’s health care fund?
In the third quarter of 2018 hedge funds are now rotating out of technology stock into healthcare, as a defensive play.
Moreover, John Paulson’s healthcare fund suggests that it could be the hedge-fund manager’s new great big short strategy, moving into healthcare.
A raft of highly paid hedge-fund managers now believe that the health of the US economy could soon stall.
These fund managers believe that the FANGS (Facebook Amazon, Netflix, and Google) heydays are over.
Additionally, consumer discretionary sector has fallen out of favor among the hedge funds. Consumer discretionary is the term given to goods and services that are considered non-essential by consumers, but desirable if their available income is sufficient to purchase them. Consumer discretionary goods include durable goods, apparel, entertainment and leisure, and automobiles.
“The healthcare sector has seen the sharpest increase in capital funds from hedge-fund since the second quarter of 2018”
So John Paulson’s healthcare fund is a classic defensive play
When investors believe that the economic cycle has peaked and heading downwards capital tends to rotate out of the discretionary sector into the defensive sector, such as stables and healthcare. This is also known as nondiscretionary household spending.
Non-discretionary spending is that required by a budget, contract, or other commitment. So non-discretionary spending stocks usually outperform discretionary spending stocks in an economic downturn, recession.
John Paulson’s healthcare fund would then be less sensitive to an economic downturn than say technology or consumer discretionary spending.
Perhaps it is for this reason that hedge funds have collectively more than 17 percent of their portfolios invested in healthcare stocks at the end of the second quarter, according to data from Goldman Sachs Group.
The healthcare sector has seen the sharpest increase in capital funds from hedge-fund since the second quarter of 2018. Indeed, in the past year hedge funds have rotated $90 billion into healthcare stocks, which now make up 4 percentage points more of their portfolios than the sector’s percentage of the Russell.
So which sector bleed capital?
In short, consumer discretionary spending experienced the sharpest decline in capital flows. Furthermore, much of that money has come from tech, whose overweight of the index among hedge funds has shrunk to less than 1 percent. Bets on consumer discretionary stocks have shrunk as well.
“Shifts to how these middlemen negotiate drug prices are likely to benefit pharma firms, not hurt them” – Bloomberg
With capital flights into health care now in play, John Paulson’s healthcare fund could finally start paying off
Capital rotating into the healthcare sector is likely to fuel the bull market in healthcare stocks going forward. Healthcare stocks are already up over 13.6 percent in the past three months, outpacing the 8.9 percent increase in the S&P 500 during the same period. But the real winners are likely to be healthcare stocks with a technology fusion.
In a piece entitled, Zero in on Q2 2018 earnings posted July 21 I wrote
“…join the dots and a vision of a true black thoroughbred stock emerges, a technology stock with a focus on healthcare.”
John Paulson’s healthcare fund could be interpreted as a bearish, or a cautious take on the economy going forward. Maybe that is also a clue that investors should buy healthcare stocks.
Healthcare stocks and pharma stocks, in particular, are also trading at a discount to the broader market, which could account for some of the appeals.
But what about the US administration’s pharma “price freezing” policies?
That unlikely to take the shine away from John Paulson’s healthcare fund. Some sector analysts believe its all political rhetoric.
“Shifts to how these middlemen negotiate drug prices are likely to benefit pharma firms, not hurt them” reported Bloomberg.
But it is the bearish mood amongst the world top hedge funds, such as David Tepper’s 20% stock pull-back view that is likely to benefit John Paulson’s healthcare fund.
Part of the rotation toward health care is inspired by a growing bearishness about the economy. Financials, which is one of the sectors most sensitive to an economic downturn is also the most under-weighted by hedge funds relative to the Russell index.
So then is John Paulson’s healthcare fund the new big short?
Dan Loeb targets Sony. Dan Loeb is an activist investor and founder of Third Point, which oversees about $14.5 billion in assets.
Last year the activist investor viewed Campbell soup as a bargain when Third point reported that the soup maker could fetch a takeover value of $52 to $58 per share.
A year later and the activist investor Dan Loeb targets Sony
Dan Loeb's activist hedge fund Third Point is raising an investment vehicle to generate between $500 million and $1 billion so it can continue to buy Sony shares, according to a recent report in Reuters.