It’s no secret that hedge funds have been underperforming the market by quite a wide margin in the last couple of years. However, in the industry that encompasses hundred of hedge funds and has gathered over $3.0 trillion in assets under management, there still are many players that posted great returns. This is particularly the case for some smaller funds, which are more nimble and can easier navigate around the market. Moreover, some sector-focused hedge funds that invested in high-performing sectors like healthcare or tech also enjoyed strong returns. This is the case of Jeffrey Jay and David Kroin‘s Great Point Partners, which invests only in the healthcare sector, and which saw great returns due to four of its top six holdings registered gains well above 100% last year.
Great Point Partners is Greenwich, Connecticut-based hedge fund that was co-founded by Dr. Jefferey Jay MD and David Kroin in 2003. Jeffrey Jay and David Kroin are currently managing directors at the firm, alongside Adam Dolder, Joseph Pesce, CPA, Noah Rhodes and Rohan Saikia. The fund invests both in private and public equity and has assets around $900 million.
We calculate a fund’s returns by taking into account its long positions in companies with a market cap above $1.0 billion as disclosed in quarterly 13F filings. This assessment of an investor’s performance is not entirely accurate, since it excludes short positions and investments that funds are not required to disclose. However, it allows us to see if the fund’s stock picks are worth following. We aggregate data from over 600 hedge funds that we track and identify the best stocks that the best-performing hedge funds collectively like using our proprietary methodology. The stock picks are part of our investment strategy and we share them in our premium quarterly newsletters. We also have a separate monthly newsletter, which looks into an activist fund each month and discusses best ways to imitate it.
Going back to Great Point Partners, based on our calculations, its stock picks returned 37.1% in the fourth quarter, which makes it the best performing fund among those we track. Moreover, a great fourth quarter puts Great Point’s 2017 returns at 69.3%.
In its latest 13F filing, Great Point disclosed an equity portfolio worth $586.07 million as of the end of December. While the equity portfolio is focused on the healthcare sector is highly diversified across companies, as the largest holding comprises just 7.50% of the equity portfolio value and there are a total of 37 positions excluding those in ‘Call’ and ‘Put’ options. The fund also doesn’t invest for the long run, with most positions having been initiated last year.
Having said that, let’s take a look at the best performing companies among the fund’s top picks and a couple of stocks that Great Point Partners added to its equity portfolio during the last three months of 2017.
In Zogenix, Inc. (NASDAQ:ZGNX), Great Point Partners held 1.12 million shares, up by 9% on the quarter; the value of the holding was $44.91 million at the end of the year. The pharmaceutical company is one of the fund’s longer-term investments as it held shares since the second quarter of 2015. Last year, the bet on Zogenix, Inc. (NASDAQ:ZGNX) paid off big time, as the stock registered gains of 230%, most of which were in a single day, on September 29. The company reported that its lead candidate ZX008 showed positive results in a Phase 3 clinical trial in patients with a rare and severe form of epilepsy called Dravet syndrome. In November, Zogenix also launched a Phase 3 trial of ZX008 for the treatment of seizures in patients with Lennox-Gastaut syndrome, a rare and severe form of childhood epilepsy. The company got the Fast Track status for Dravet and Orphan Drug status for Lennox-Gastaut syndrome. Overall, there are 31 funds in our database long Zogenix, Inc. (NASDAQ:ZGNX), which collectively hold over 49% of the company’s stock as of the end of 2017.
Great Point cut its stake in Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) by 13% to 1.18 million shares worth $39.99 million during the fourth quarter. The fund added Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) to its equity portfolio during the second quarter of 2017 and saw the stock surge by 145% since the beginning of July. In July, Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) reported positive results from a Phase 2 study of ralinepag for the treatment of pulmonary arterial hypertension. In November, the company launched a Phase 2 trial of etrasimod in patients with ulcerative colitis. Heading into 2018, there were 19 funds bullish on Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) among the investors tracked by us.
SAGE Therapeutics Inc (NASDAQ:SAGE)‘s stock surged by over 222% during the last year, helping lift Great Point’s returns, as the fund has held shares of the company since 2016 and disclosed a $32.94 million stake containing 200,000 shares in its latest 13F filing; during the October-December period, the fund boosted its exposure to SAGE Therapeutics Inc (NASDAQ:SAGE) by 82%. At the same time, SAGE Therapeutics delivered two pieces of positive news in the last two months of 2017. In November, it reported successful results from two Phase 3 clinical trials assessing an intravenous of product candidate SAGE-547 (brexanolone) for the treatment of women with postpartum depression. The following month, SAGE Therapeutics Inc (NASDAQ:SAGE)’s Phase 2 trial that evaluated product candidate SAGE-217 for the treatment of adult patients with moderate-to-severe major depressive disorder also showed positive results, which indicated that the drug candidate could get the Fast Track designation. Earlier this year, SAGE Therapeutics Inc (NASDAQ:SAGE) also announced positive results from a Phase 1/2 insomnia study of SAGE-217. Amid positive study results disclosed in November and December, SAGE saw the number of investors from our database holding its shares jump to 38 from 22 during the fourth quarter.
Let’s now take a look at two new picks in Great Point’s equity portfolio. One is Spark Therapeutics Inc (NASDAQ:ONCE), in which the fund amassed 410,900 shares worth $21.13 million. In December, Spark Therapeutics Inc (NASDAQ:ONCE)’s stock tanked on disappointing results from a study of its hemophilia A candidate SPK-8011, which lagged behind a similar candidate under development by BioMarin Pharmaceutical Inc. (NASDAQ:BMRN). The decline provided a good buying opportunity and Great Point probably believes that the setback was temporary. However, among the funds in our database the sentiment is not as optimistic, since the number of investors long Spark Therapeutics Inc (NASDAQ:ONCE) slid by 12 to 14.
Another new position in Great Point’s portfolio is represented by NewLink Genetics Corp (NASDAQ:NLNK), in which the fund owns 1.99 million shares valued at $16.12 million. NewLink Genetics Corp (NASDAQ:NLNK) is a immuno-oncology company focused on developing and selling immunotherapeutic products for the treatment of cancer. In September, NewLink Genetics Corp (NASDAQ:NLNK) entered into a collaboration with AstraZeneca plc (ADR) (NYSE:AZN) to study the combination of its indoximod with AstraZeneca’s durvalumab. There were 13 funds long NewLink Genetics Corp (NASDAQ:NLNK) at the end of December, down by five over the quarter.