Even as hedge funds have increasingly invested in large vaccine developers since Covid-19 shut global economies in March, they’ve mostly sat on the sidelines as the stocks of small and mid-cap companies working on a vaccine rallied by more than 1,000 percent this year.


Although hedge funds clearly missed out on a big opportunity, their lack of exposure to these stocks may also be a healthy show of restraint, according to Jon Caplis, CEO of hedge fund research and analytics firm PivotalPath. The research firm’s index of small and mid-cap vaccine developers has increased 1,191.1 percent this year through July. 

Hedge fund managers told PivotalPath that valuations of these stocks have been too high given that in the end there will be very few companies that win the vaccine race. Caplis said the intelligence he’s gotten from hedge funds has been consistent. Back in April and May, they said that the stocks had rallied so much that there was a lot of downside risk in betting on any one company’s success. PivotalPath’s quantitative analysis also showed that hedge funds held a negligible amount of these stocks.

Many health care hedge funds generally assess companies based on broader efforts, such as their drug pipelines or multiple product lines. Investing in vaccine developers “was a concentrated bet, much more like gambling than any deep understanding of the quality of a company itself,” Caplis said. 

Investors should ask hedge funds about the level of their interest in these companies now, including whether they may short the stocks, Caplis said. He noted that it’s tempting to jump in late in the game and try to reap some gains after missing out on a rally. “If they say, ‘We’re avoiding these names,’ well then hold them to account,” Caplis said.

[II Deep Dive: Hedge Funds Said One Thing. Their Portfolios Show Another.]

With the government funding some of the largest pharmaceutical names and other large companies reporting advances, small and mid-cap stocks have given up some of their gains, even though the sector remains volatile.  “It will be interesting to see if hedge funds will get involved on the pull back,” Caplis said. 

Hedge funds haven’t entirely missed out on vaccine developers. They’ve focused on the largest brand names such as Moderna and Pfizer. PivotalPath’s large-cap vaccine developer basket was up around 57 percent through July. The PivotalPath Equity Sector Healthcare Hedge Fund Index was up 1.6 percent in June and 5.4 percent in the first half of the year. 

The Healthcare index was down 1.3 percent in July. According to PivotalPath, the strategy has been among the most consistent in generating alpha, or unexplained returns above a benchmark. Health care generated 6.8 percent alpha over the last 12 months, through July, and 5.8 percent over the last 24 months.