Amid The Perceived Gloom In The Hedge Fund Universe, This Hedge Fund’s Stock Picks Gained 38.8% in Q1

The dismal performance, redemptions and shuttering of some hedge funds have received significant media attention in the past two years. Given that the widely followed benchmark, the S&P 500, has been on an unprecedented bull run during this time, it is easy to mock the underperformers and complain about the exorbitant fees charged by hedge funds as a group. However, what people and the media often forget is that hedge funds as an asset class generally tend to underperform during a bull market. And even though some hedge funds have been underperforming, there are others like Eli Casdin’s Casdin Capital, whose investments in 11 companies with a market cap of over $1 billion delivered a weighted average return of 38.8% in the first quarter according to our calculations.

It’s not hard to understand why several hedge funds underperform during bull markets. What we today know as hedge funds got their name from the simple fact that they are hedged, which essentially means shielding one’s long portfolio from dramatic drawdowns by also shorting some stocks. Since most hedge funds even today run a short portfolio alongside their long portfolios, the losses from their short positions eat into the returns of their long portfolio during bull markets and result in underperformance.

However, the good thing is that this process also works in reverse. In 2008, when the U.S was going through one of the worst financial crises in its history, which saw the S&P 500 take a hit of 38%, hedge funds as a group lost only 18%, thereby outperforming the index by a hefty 20 percentage points. Since we were in the midst of the worst financial crisis in decades back then, most of the financial media chose to conveniently ignore this outperformance and focused only on the funds that blew up during the crisis.

While we can give the financial media some leeway for not reporting the outperformance of hedge funds during those times when the whole economy was in distress, what’s stopping them today? News like the underperformance of John Paulson’s Paulson & Co. or the hit that David Einhorn’s Greenlight Capital took due to its position in Sunedison Inc makes front page news, while the remarkable performance of hedge funds like Alex Denner’s Sarissa Capital Management, whose stock picks have generated a return of over 200% in the last year, are rarely if ever mentioned.

Having said all this, we are not blaming the financial media for the news that it chooses to report or advocating that one should pay exorbitant fees to hedge funds. What we are saying is that there are a lot of hedge funds outperforming the market with exceptional stock picks and that investors can likewise outperform the market if they focus on only the best picks of the top performing hedge funds like Casdin Capital or Wildcat Capital which we covered yesterday.

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That’s what we do at Insider Monkey and our flagship strategy has returned 44.2% since February 2016 vs. a 29.6% gain for the S&P 500 index ETF (SPY). Our most recent stock picks, which were disclosed to our subscribers in the middle of February, beat the market by 5 percentage points in the three months since, and we are going to disclose our new stock picks today. Our system is easy for investors to implement, with just a small batch of trades to be executed once per quarter. We are also offering a 14-day money-back guarantee as well as a large discount on our premium newsletters, so you can check out our latest picks risk-free and see if Insider Monkey’s small-cap strategy is right for your portfolio.

Now then, let’s check out three stocks from Casdin Capital’s equity portfolio that helped the fund generate such stellar returns in the first quarter.

SAGE Therapeutics Inc (NASDAQ:SAGE)

SAGE Therapeutics Inc (NASDAQ:SAGE) was Casdin Capital’s top equity pick at the end of the first quarter, with the fund having sold a paltry 4,500 shares of the company during that period. The stock has been on a bull run since the second-half of 2016 and managed to end the first quarter up by over 40%. During those three months, the value of Casdin Capital’s holding in the company rose to $18.12 million, though the fund’s 13F portfolio’s exposure to the stock remained nearly the same, which just goes to show how well that portfolio performed during that time.

A large part of the gains that the stock saw during the first quarter came in mid-February when the company reported positive trial data for its major depressive disorder (MDD) candidate SAGE-217. A few days after announcing that data, SAGE Therapeutics Inc (NASDAQ:SAGE)’s CEO, Jeff Jonas, said that the company has received overtures for a possible buyout, which caused the stock to rally even further. However, the very next day, on February 17, SAGE released a statement saying that its CEO acknowledged industry interest in the MDD data, but that it didn’t imply that the company was in talks with any potential acquirer. Earlier this month the company reported better-than-expected first-quarter results, declaring a loss of $1.52 per share versus analysts’ expectations of a loss of $1.61 per share.

Considering that SAGE’s stock has been moving swiftly this year on news, be sure to subscribe to real-time e-mail alerts on the stock below.

On the next page we’ll check out two other stocks favored by Casdin Capital.

Foundation Medicine Inc (NASDAQ:FMI)

Foundation Medicine Inc (NASDAQ:FMI) has been one of the best performing pharma stocks this year, producing a gain of over 100% for its shareholders. With a gain as large as that in such a short period, it’s natural for investors to take some profits off the table and that’s exactly what we believe Casdin Capital did during the first quarter, reducing its stake in the company by 12% or 66,000 shares. However, this reduction in the stake didn’t reduce the Casdin Capital’s exposure to the stock in its 13F portfolio, with it instead accounting for a larger share (9.13%) of its portfolio at the end of March than it did at the end of December (7.98%).

On March 9, short-selling focused website TheStreetSweeper posted a bearish article on Foundation Medicine Inc (NASDAQ:FMI), stating that the stock was grossly overvalued. Interestingly, nearly all the gains that Foundation’s stock has generated this year came before this article was posted. Although the stock hasn’t retraced much since the article was published, it has been range-bound for more than two months. In the article, Sonya Colberg pointed out that the company has been reporting gradual declines in its financial performance for the past four quarters (and now five if one includes its latest quarterly results that were announced after the article was posted). Moreover, it also highlighted how Foundation’s gross margins have declined to 39% from 57% in the preceding year and that the company is no match to rivals Myriad Genetics, Inc. (NASDAQ:MYGN) and NeoGenomics, Inc. (NASDAQ:NEO) when it comes to its operational performance (which could be considered a valid concern, but also as a potential opportunity for improvement).

We have one more stock to cover on the next page.

Loxo Oncology Inc (NASDAQ:LOXO)

Another major winner for Casdin Capital this year has been Loxo Oncology Inc (NASDAQ:LOXO), whose stock has appreciated by 38.7% year-to-date. It’s also the only company among the fund’s top-three stock picks in which it didn’t reduce its holding during the first-quarter, keeping it unchanged. Though the stock generated over $5 million in profit for the fund during the first-quarter, Casdin Capital actually had less exposure to it in its 13F portfolio by the end of the quarter (down to 8.94% from 9.55%) due to the relative outperformance of other stocks that the fund held.

At the beginning of the year, Loxo Oncology Inc (NASDAQ:LOXO) held a secondary public offering of 3.87 million units of its common stock at $31 each. The company disclosed that it would be using the net proceeds from the sale for R&D, to fund early commercialization activities for its lead product candidate larotrectinib (LOXO-101), and for general corporate purposes. In March, the company announced that it had signed a collaboration agreement with Ventana Medical Systems to develop and commercialize a pan-TRK immunohistochemistry (IHC) test as a companion diagnostic to identify suitable patients for treatment with larotrectinib. Earlier this month, Loxo Oncology Inc (NASDAQ:LOXO) enjoyed a major win when the FDA designated larotrectinib as an Orphan drug for the treatment of solid tumors with rare genetic abnormalities called NTRK-fusion proteins. Most analysts which cover Loxo are currently bullish on it, including Morgan Stanley analyst Mathew Harrison, who has an ‘Overweight’ rating and $59 price target on it, suggesting upside potential of 32.46%.

Disclosure: None