Hedge Funds Were Aggressive Buyers During Health-Care Sell-Off

(Bloomberg) -- Some of the health-care industry’s biggest stock-market backers are standing firm against the carnage spurred by growing angst over Medicare for All.

Rather than bailing, hedge funds have rushed to snap up the shares amid the sell-off, taking advantage of contracting valuations after the group posted its worst week of 2019. Their purchases last week ranked in the 98th percentile by size over the past 12 months, client data compiled by JPMorgan’s prime brokerage unit showed. Goldman Sachs found the same buy-the-dip mentality among its clients, with bullish wagers outpacing bearish ones by 3-to-1.

Hedge Funds Were Aggressive Buyers During Health-Care Sell-Off

The conviction counters speculation that hedge-fund selling fueled losses that spiraled a week ago. On the other hand, contrarians might see it as bearish, with the sector remaining a crowded trade with big investors sticking to bets. The shares have been susceptible to sentiment swings at a time when drug pricing and insurance coverage are a heated election topic among politicians.

“There is an attention to crowding that’s present in the market that’s just suddenly bubbled up over the past few weeks,” Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, said by phone. “And health-care is one that I talked a lot about” with clients, she said.

Hedge funds last week bought shares in companies from drugmakers to providers of health-care equipment and services, JPMorgan data showed. While their industry exposure hovered at the 43rd percentile over the past year, that’s almost double their overall equity positioning.

At Goldman, net buying over the week was 1.5 standard deviation above a historic average. Clients covered short sales in exchange-traded funds and scooped up biotech and pharmaceutical stocks, suggesting “little evidence of a broad de-risking or capitulation,” the firm wrote in a note.

The industry rebounded Tuesday to lead the S&P 500 to a fresh record. Still, up less than 1 percent, it’s having the worst start to the year relative to the broad index since 1993.

Hedge Funds Were Aggressive Buyers During Health-Care Sell-Off

Specialist industry investors weren’t responsible for the sell-off last week, according to Scott Kay, the founder and chief investment officer of Asymmetry Capital Management, a health-care focused hedge fund. Instead, he said it was driven by low conviction holders, which tend to be generalist mutual funds and retail investors.

Other big investor categories have embraced health-care stocks. In the fourth quarter, the group saw the biggest increase in ownership among large-cap mutual funds, data compiled by RBC showed. Johnson & Johnson, UnitedHealth Group and Merck & Co. are among the most widely owned.

“We think the odds of Medicare for All are zero,” Kay said. “But the behavior of the stocks was the antithesis of that.”

Investors have flocked to health-care, betting a growing aging population will help sustain earnings amid any economic slowdown. The group bucked a broad market decline last year, scoring the biggest gain among industries as money flowed to safety.

While Medicare for All is a longshot to become law despite the backing of some contenders for the Democratic presidential nomination, such political pressure makes some health-care companies particularly vulnerable, according to Jon Feldman, an investment manager at Aberdeen Standard Investments.

“Managers generally think this proposal is not very realistic, therefore making the sell-off a buying opportunity,” he said. “On the other hand, managers think there is more bipartisan support to tackle drug pricing, and the Trump administration may take action using an executive order to study Medicare drug reimbursement rates relative to foreign governments. This is dangerous for pharma and biotech, and is presenting short opportunities.”

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