This Healthcare Fund Just Had A Huge Q3: Here’s How

The mainstream media likes taking shots at hedge funds because they are easy targets. These investment vehicles are usually run by very wealthy individuals, who often make loads of money even when their portfolios underperform. This is especially true in recent years, as hedge funds’ performance has been underwhelming. However, there’s a reason people entrust their money to these fund managers and that is because many of them have a history of outperformance, of using their immense resources to find undervalued and/or misunderstood stocks and profiting from them. It is inevitable that there will be stretches of underperformance, but in the long-term, these investment vehicles have proven their merit.

Such is the case with James A. Silverman‘s Opaleye Management, whose June 30 long positions in eight stocks with a market cap of at least $1 billion delivered monstrous third-quarter weighted average returns of 38.3%. As the fund held many large positions in micro-cap stocks which were not included in our returns calculations, it should be noted that the fund’s actual returns could be quite different than our estimates.

In this article we’ll take a look at four of the healthcare-focused fund’s top picks in $1 billion+ stocks, which helped propel it to those huge returns.

Let’s start with Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA), a popular $1.73 billion market cap company which has robust average daily trading volume of over 8 million shares. Opaleye held a $9.24 million position in the stock on June 30, its third-most valuable position at the time. Ariad’s shares skyrocketed by 85% during the third quarter, making it one of the top performers in the fund’s portfolio. However, a health sector downturn in October has resulted in a sizable chunk of those gains having been given up. Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA) announced the FDA’s acceptance of its New Drug Application for brigatinib earlier this week.

At Q2’s end, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from the first quarter of 2016. Alex Denner’s Sarissa Capital Management held the largest position in Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA), worth close to $95 million, comprising 27% of its 13F portfolio. The second largest stake was held by Consonance Capital Management, managed by Mitchell Blutt, which held a $65.4 million position.

Opaleye Management owned 330,000 shares of FibroGen Inc (NASDAQ:FGEN) on June 30, with the position being its fourth-most valuable. Shares of the company gained 26% during the third quarter, but have also trended down during the fourth quarter. FibroGen Inc (NASDAQ:FGEN) announced this week that it has completed the enrollment for its roxadustat clinical trials in China. The trial will test the treatment’s efficacy at combating anemia in patients with chronic kidney disease.

So we know Opaleye Managemen is a fan of FibroGen Inc (NASDAQ:FGEN), but let’s check out what its peers think of the company. As of June 30, 7.30% of Fibrogen’s shares were held by 17 funds that we follow, making them overweight the stock. That compares to 15 funds long the stock a quarter earlier. Phil Gross and Robert Atchinson’s Adage Capital Management held the biggest position in the equity among those funds, amounting to 2.74% of its float. Oleg Nodelman’s EcoR1 Capital owned 1.26% of the float, while Lei Zhang’s Hillhouse Capital owned 0.39% of the outstanding shares.

We’ll check out two other top picks of Opaleye Management on the next page.