Administering Asia's first healthcare hedge fund

Stephen Barker, senior analyst at Japan Advisory talks about Whitney''s Asian long/short healthcare fund.

Whitney & Co., a US-based private equity and hedge fund firm, launched Asia's first healthcare hedge fund in August 2004. The fund currently has $160 million under management and is targeting a return of 15% to 18% per annum, with 5% volatility. In its first month of trading, the fund was up 2%. Goldman Sachs has been appointed as the fund's prime broker and administrator.

What's the rationale behind a dedicated Asian healthcare hedge fund?

Barker: There are powerful trends at work in the Asian healthcare space that are driving changes in the industry. Asia's aging demographic profile means that healthcare spending is likely to grow faster than the overall economy. The potential for growth is enormous, as data shows that the average consumption of healthcare services for people over 60 years old in Japan is five times more than those under 60.

This aging population is putting government healthcare systems under pressure, especially in places like Japan and China. In Japan, the government has allowed a private sector healthcare industry to grow, especially in the area of long-term care. Rising standards of living, rapid technological advances and the availability of new services are encouraging people, and particularly the elderly, to spend more on their healthcare, and to opt for private care. Currently, Japan only spends 7% of its GDP on healthcare, which is half the portion that the US spends.

While increased healthcare spending is an overall plus, efforts by governments to hold back spending growth is also creating losers, which provides ample opportunity for our short book.

How do you define an Asian healthcare stock and how big is the universe?

We estimate that there are over 1,000 Asian healthcare companies with a combined market cap of more than $300 billion. More than 75% of this market cap is listed in Japan, with China, India, Korea and Australia making up the bulk of what remains. The largest sectors are pharmaceuticals, med tech and healthcare services, but the scope of the universe includes medical devices, biotech, medical wholesalers, testing labs and hospital management.

The Asian healthcare sector is large, liquid and diversified, plus stock borrow is easily accessible. There's an active IPO pipeline and M&A market, with new companies constantly being created.

How is your team organized and what is the background of the team members?

So far, we are an investment team of three. Currently we are mainly focusing on the Japanese healthcare market, because this is by far the largest market in Asia and it's where the bulk of our team's expertise lies. However, as our fund expands in size we'll add another analyst to the team who has knowledge of healthcare companies outside of Japan.

Ed Brogan is the fund's senior advisor. He's been advising Whitney's Japan fund for four years and was previously a managing director at hedge fund Tiger Management.

Chris Redl and I are the senior analysis dedicated to the healthcare fund. I've been focused on Asia's healthcare industry for nine years, first as a scientific editor at various specialist journals and most recently as a research analyst with UBS based in Tokyo, where I headed up the healthcare research team for almost six years.

Chris and I worked together at UBS. He's worked as an investment professional for the last nine years, and previously worked with Morgan Stanley and ING Barings.

What is your investment process?

At the fundamental bottom-up level, we conduct detailed company analysis. We meet with management, customers, suppliers, competitors and clinical researchers to get an overall picture. We also talk to healthcare analysts to get a sense of what consensus opinion is. For a deeper insight, I read a lot of industry journals and talk frequently to well connected individuals in the industry. This is particularly important in terms of keeping on top of the legal and regulatory issues.

From a top-down perspective, we look for industry themes and macro factors to guide our net and gross exposure to individual sub-sectors.

Our Asian healthcare fund takes quite a different approach to US healthcare funds, which tend to focus on biotech and pharmacy. We, on the other hand, have a much broader range of companies in our funds, which gives us more scope for creating an "all-weather" portfolio that can provide positive returns under all market conditions. One of our main focus points is the national healthcare system in Japan, which is ever changing. A deep understanding of this system, which impacts all Japanese healthcare stocks, gives us an edge in positioning our investments.

We're also different from our US counterparts because we don't just focus exclusively on fundamentals. We look at companies as stocks trading in a market as well, so there is an element of technical analysis too. We look at stocks individually and use charts to size positions. We also pay a lot of attention to flow of funds. Foreigners account for 50% of the volume in the Japanese market and its important to be aware of who is buying and selling. We work side-by-side with the other analysts working on Whitney's other funds, and this helps us make the right investments in the host of "hybrid" companies in Japan, which combine substantial healthcare operations with other non-healthcare operations. Companies like this abound in the med-tech and chemicals area.

What is the fund's capacity? What type of investors are interested?

The fund has a capacity of $350 million. We have raised about $160 million to date and have made capacity agreements for another $150m or so. We expect to be closed by the end of the year.

Many of our initial investors are already invested in existing Whitney funds and are familiar with Ed Brogan and the Whitney team and have confidence in our abilities. Investors are interested in our healthcare strategy either because they want exposure to healthcare or because they are looking for Asian exposure uncorrelated with equities or other hedge fund strategies. As far as we know our Asian Healthcare strategy is unique.

Can you give an example of a recent long/short trade?

Recently we placed a short trade on a medical equipment rental company. Our research showed that in an attempt to cut costs, the government's upcoming insurance guidelines would exclude a majority of the firm's clients from coverage of the rental costs of beds and wheel chairs. We believed the introduction of the new rules would force the company to revise their earnings expectations downwards.

On the long side, we recently invested in a hospital catering company. We estimate the increasing focus on cost control at hospitals will lead to a doubling of the number of hospital catering service contracts over the next three years

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