Michael Castor predicted the coronavirus pandemic when most investors were dismissing the threat. S&P 500 Index lost nearly 20% during the first quarter, yet Castor’s healthcare focused hedge fund Sio Capital returned more than 7% during the same period.
Most equity hedge funds aren’t truly hedge funds. They are almost never 100% hedged. That’s because they can’t generate pure alpha high enough to justify their 2-and-20 fee structure. A typical hedge fund manager these days can outperform the market by an average of 2-3 percentage points in its long portfolio. So, if the market returns 10%, a typical hedge fund will probably return 12-13%. This isn’t bad, but no investor in their right mind would pay 2% fixed annual fee plus a 20% performance fee for such a performance (the net return would fall to 8% after these outrageous fees). So, they try to confuse investors by reducing their net exposure to 50% and pretending that what they return is pure alpha.
Michael Castor isn’t like this. On average his portfolio has been actually 5-10% net short over the last 7-8 years. His fund returned more than 11% annually over this period and all of this is pure alpha. There are very few hedge fund managers who can deliver this type of alpha over very long periods of time.
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We interviewed Michael Castor this weekend and shared the video below. In the first half of this video we talked about Sio Capital, markets, and the coronavirus pandemic. We shared his views on Gilead Sciences Inc (NASDAQ:GILD) and efficacy of remdesivir earlier today here. “We’re actually at probably our max short position. I’m finding very little that’s cheap and a large number of stocks that are outrageously expensive,” Castor said in the interview below.
The second half of the video was dedicated to Michael Castor’s opinions on most of the large healthcare stocks. We asked him about Merck & Co., Inc. (NYSE:MRK) (see the 34:51 minute mark in the video above). “Merck like Glaxo has a single drug that is driving the entire performance of the company,” Castor said. Merck’s keytruda revolutioned the treatment of cancer and Castor think it “probably has the potential to grow to be a twenty billion dollar drug”.
Unfortunately Castor doesn’t think Merck & Co., Inc. (NYSE:MRK) is a very attractive stock to invest right now. “Merck falls in that that category of being slightly attractive but at this point already close to fair value,” Castor concluded.
He also shared his best U.S. and European healthcare stock ideas with us. You can find out the name of his top European stock towards the end of the interview. We have been recommending a position in his top U.S. healthcare stock pick in our monthly newsletter, so I had to cut that part of the video out. However, you can still find out his top European healthcare stock pick which he expects to double.
If you are interested in finding out Michael Castor’s top healthcare stock pick, please subscribe to our monthly newsletter. The portfolio of our stock recommendations in the monthly newsletter returned 71.8% since March 2017 (through April 28th) vs. 27.9% gain for the S&P 500 ETFs. There aren’t a lot of fund managers whose picks beat the market by 44 percentage points in the last 3 years.
Disclosure: No positions in Gilead Sciences Inc (NASDAQ:GILD) and Merck & Co., Inc. (NYSE:MRK). This article is originally published at Insider Monkey.
