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June 10, 2020  

Pipeline Filling With Healthcare Startups

A slew of startup hedge fund operators are touting their abilities to make money in a healthcare-stock sector that has been whipsawed by the coronavirus crisis.

Portfolio manager Watt Boone left GMT Capital in recent weeks with plans to form a yet-to-be-named firm. And D.E. Shaw alumnus Abhishek Trehan launched his Darwin Global while continuing to raise money.

Also moving ahead was one-time Geode Capital portfolio manager Mitch Livstone, who started trading an undisclosed amount of money through his Black Coffee Capital last month. Working through a venture called Eagle Health Investments, meanwhile, former Ziff Capital chief investment officer Gary Stern has lined up $150 million from one investor plus backing from Dirk Ziff (see article on Page 2).

The firms join a 2020 launch calendar that additionally includes Paqua Capital, led by former Man GLG executive John Gisondi, and Albemarle Management, the brainchild of PAR Capital alum Tyler Saeli.

In most cases, the firms plan to run strategies with low net exposures that wouldn’t depend on equity-market swings to make money. The approaches in part take into account sharp changes in momentum that have occurred as investors puzzle over the effects of the coronavirus pandemic.

Indications are that Boone, who had been stationed in GMT’s Atlanta office since 2006, is specifically timing his efforts in response to what he sees as attractive opportunities. It’s too early to tell how much capital he might raise for his fund, which is seen as unlikely to start trading before the first quarter of 2021.

Boone, whose earlier employers include DCF Capital, is expected to assemble a staff before moving ahead.

At Darwin, Trehan, who holds a medical degree from Oxford University, runs a variable net exposure under most market conditions.

Black Coffee, meanwhile, keys in on the shares of small- and mid-cap oncology and immunology companies. Livstone, who has both fundamental and quantitative investment credentials from his time at Geode and stints at Harvard University’s endowment and Fidelity Investments, combines those approaches to follow a hybrid format that relies in part on machine-learning algorithms to more accurately predict the results of clinical trials.

Black Coffee, based in Boston, maintains a long bias with a net exposure of 0% to 50% and also invests in equities through fundamental analysis.

Livstone fine-tuned Black Coffee’s approach with input from executive chairman David Berry, a physician who also is a general partner at venture capital firm Flagship Pioneering.

Thurston Towle, whose former employers include Force Capital, is Black Coffee’s chief operating officer and chief compliance officer. Jason Ableowitz, most recently of RDC Capital, is chief financial officer.

By some measures, the values of biotechnology companies — the bread-and-butter of many healthcare-stock funds — are near all-time highs. But the shares of hospital operators that rely on elective surgery have plummeted. Industry participants believe the onus is on the new crop of managers to prove that they can carve out alpha, with the upcoming presidential election adding uncertainty.

At the same time, any firm that correctly bets on the development of a coronavirus vaccine could be a massive winner.