Biotech is a hot segment right now and even though it has many opportunities, it is also associated with a lot of risks. Out of hundreds of companies, it can be difficult to pick the real winners, but one of the easy ways to find some of the best-performing picks is to look at the stocks in which hedge funds prefer to invest their money, because they spend a significant amount of resources analyzing stocks. For the biotech industry, one of the best investors whose picks you can emulate is Venrock Healthcare Capital Partners, managed by Anders Hove and Bong Koh. Based on our calculations, which involve holdings from its 13F filing in companies with market caps above $1.0 billion, VHCP’s qualifying stock picks returned over 17% in the third quarter and almost 59% during the first nine months of 2015 (see more details about the fund’s third quarter performance and its top picks).
Another argument that supports the utility of imitating smart money investors is our research, which showed that following hedge funds into some of their picks can help retail investors generate market-beating returns. Following the 15 most popular small-cap picks can beat the market by as much as one percentage point per month on average. Our strategy that imitates an equally-weighted portfolio of these stocks has returned 102% since August 2012, beating the broader market by around 53 percentage points (see more details here).
Let’s get back to VHCP, which recently reported adding a new company to its equity portfolio. According to an SEC filing, VHCP currently owns around 2.07 million shares of the small-cap Edge Therapeutics Inc (NASDAQ:EDGE), which represent 7.2% of its outstanding stock. Edge Therapeutics has surged by over 70% since the beginning of the month, when it went public. During the IPO, the company sold around 8.41 million shares, including over-allotment options at $11.00 per unit. According to its S-1 filing, entities affiliated with Venrock held 1.61 million shares before the IPO. Other investors that held shares before the company went public included Sofinnova Venture Partners IX, L.P., Janus Global Life Sciences Fund, entities affiliated with New Leaf Ventures III, L.P., and Franklin Advisers, Inc..
Edge Therapeutics Inc (NASDAQ:EDGE) is engaged in the development of novel hospital-based therapies. Last week, it announced that its lead product candidate, EG-1962, which is developed for treating patients that have suffered an aneurysmal subarachnoid hemorrhage, had received orphan drug designation from the European Commission.
Aside from Edge Therapeutics Inc (NASDAQ:EDGE), let’s take a look at VHCP’s other new position, which was initiated during the second quarter. The fund reported ownership of 10.79 million shares of Arca Biopharma Inc (NASDAQ:ABIO). Arca Biopharma Inc (NASDAQ:ABIO) develops genetically-targeted therapies for cardiovascular diseases and its product candidate is Gencaro, a beta-blocker for the prevention of atrial fibrillation in patients with heart failure. The stock has slumped by 25% since the end of June.
Overall, a total of five funds from our database reported stakes in the nano-cap Arca Biopharma Inc (NASDAQ:ABIO), but those five believe that it has very good potential, as they amassed over 80% of its outstanding stock at the end of June. VHCP was the top shareholder of the company, followed by another healthcare-focused investor, Peter Kolchinsky’s RA Capital Management, which also initiated a stake containing 5.68 million shares.