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Healthcare
Alternatives

A True Alternative: Long/Short Allocations to Health CareATrueAlternative:Long/ShortAllocationstoHealthCare

Mar 22, 2022

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Health care (see Exhibit) is one of the largest and most diverse sectors in the global markets. It includes vast conglomerates of hospitals and caregivers, biotech start-ups, medical device manufacturers, life sciences tools, and networks of pharmaceutical companies. The sector’s public companies are fiercely competitive and profit-driven, but health care is also a vital service. Its customer base includes most of the population, and its position in the global economy is driving rapid scientific and technological advancements.

Health Care is One of the Largest Sectors in the MSCI World Index¹

As of 31 December, 2021 Source: MSCI

The convergence of technology and consumerization is fueling an unprecedented flow of innovation to address unmet medical needs and reduce costs. The sector is already being transformed by millennials, who are unlikely to put up with the bureaucracy, inflexibility, and one-size-fits-all approach that characterized health care interactions before the pandemic. At the same time, we expect technological developments — in everything from record keeping, to wearable sensors, to gene-based treatments — will force companies to adapt.

The acceleration of innovation in the sector will have a lasting impact on the patient experience as the industry switches to more preventive medicine and an outcome-based economic model. This backdrop presents unique opportunities for skilled active managers to generate alpha opportunities — both long and short — across multiple health-care industries:

Biopharmaceutical companies now have a number of different ways to treat diseases, and the types of technologies being employed are increasing at a rapid rate. As more therapies come to the public market, an investor must consider not only which therapies will be most successful in shaping patient outcomes, but also which will be approved by regulators, reimbursed by insurers, and adopted by physicians and patients. Many tenured managers in the industry have analyzed clinical trials and drug launches over different economic cycles, which helps with pattern recognition to identify which companies may be most (and least) successful, creating significant potential for alpha generation.

Medical device companies can improve or simplify the surgical process by making it less invasive or more automated. Analysts can assess which devices have more technological advantages and greater adoption by medical professionals. Short opportunities can arise when these companies leverage technologies that will become obsolete or where market expansion or reimbursement will be more difficult than expected.

Medical tools and diagnostics companies have developed technologies that take the guesswork out of care and make it easier and more convenient for patients to be engaged in their health. These tools can accelerate the research and manufacturing process to further interrogate biologic systems and their interactions. An active long/short approach can capitalize on the technological dynamic by investing in companies with long-term growth potential while shorting those companies that lack exposure to improved technologies when new innovations begin to take share.

Health care service companies are implementing technologies that can lower the cost of care and improve outcomes, such as initiatives that keep patients out of hospitals or efforts that shift procedures to lower-cost sites of care. By investing in companies that stand to benefit from a move from fee-for-service to fee-for-value models and shorting those companies that fail to reduce cost profiles or improve access to care for patients, an active manager can generate returns on both sides of the portfolio. Selecting the right investments is essential, as this approach can significantly increase the risk of loss.

The sector’s long-term — and short-term — prospects should also be considered. Many investors are aware that health care has solid long-term fundamentals; more than 10,000 Americans qualify for Medicare every day, and the “graying” of the population is a global trend.2

However, we also see opportunities in global health care because of once-in-a-generation conditions in the current environment that are making the sector one of the fastest growing areas of the global market.3 Health care services and procedures have been severely curtailed by the COVID-19 pandemic, which has drawn the focus of the industry, prevented one-on-one interactions, and hobbled the agencies responsible for conducting inspections and reviewing drug approvals. As societies and economies around the world reopen, we believe health care will be one of the primary beneficiaries.

Demand for health care services will likely accelerate as patients return to medical offices, more procedures are scheduled, and medical facilities open. While the sector does face challenges — COVID-19 variations remain a threat, a new commissioner was only recently appointed to the FDA, and the political landscape can change over time — the earnings potential should remain high.

The health care sector can also offer the opportunity to generate alpha with low correlations to other sectors as well as to other alternative investment strategies. It’s notable that some areas of health care have been out of market favor for long periods, raising its diversification potential even higher, in our view.

Finally, an alternative investment in health care offers investors potential exposure to true active management skill in a sector that requires both medical and financial expertise, especially in a market where many active managers (and their results) can be scarcely distinguished from their passive counterparts. Long and short positioning gives managers the potential to fully leverage their insights, perspective, and experience on behalf of clients.

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  1. The Global Industry Classification Standard (GICS®) is the exclusive intellectual property of MSCI Inc. (MSCI) and Standard & Poor’s Financial Services, LLC (S&P). Neither MSCI, S&P, their affiliates, nor any of their third party providers (“GICS Parties”) makes any representations or warranties, express or implied, with respect to GICS or the results to be obtained by the use thereof, and expressly disclaim all warranties, including warranties of accuracy, completeness, merchantability and fitness for a particular purpose. The GICS Parties shall not have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of such damages.

    MSCI World Index: The MSCI World Index is a broad global equity index that represents large and mid-cap equity performance across all 23 developed markets countries. It covers approximately 85% of the free float-adjusted market capitalization in each country.

    MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.

  2. “By 2030, All Baby Boomers Will Be Age 65 or Older,” US Census Bureau, December 10, 2019.
  3. ResearchAndMarkets.com: Healthcare Global Market Opportunities and Strategies to 2022

    Investing in the health care sector increases vulnerability to economic, political, or regulatory developments affecting this sector. The share price of a health care company can drop dramatically. A short sale creates the risk of a theoretically unlimited loss.

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