Manager Monday: RA Capital
Every Monday, we dive into the public holdings of a major hedge fund manager. Learn how RA Capital has outperformed in the lastest post.
Everything mentioned in this post is sourced exclusively from public data, including the manager’s profile, simulated performance and all other analysis and commentary. The data used here omits the short side, non-equity securities, many non-US securities and all non-public information such as actual fund performance.
Introduction
We read a really interesting Barron’s piece on RA Capital, where journalist Michael Shari interviewed Portfolio Manager Peter Kolchinsky about his investment process and current portfolio holdings. We have also written in the past about uniqueness as a concept we track, and RA Capital coincidentally came up through that study as the most unique alpha generator in our Hedge Fund Universe of 1000+ managers, over the last 3 years.
To briefly summarize, uniqueness is how a manager differentiates itself from its peers by investing in securities that are less crowded. Per the Barron’s piece, the fund has annualized at an astounding 28.4% since inception (10+ year period). As the fund has filed regulatory filings only for the last 8 years, we’ll do a deep dive in terms of what has worked for the fund through the lens of our alpha platform. Please note that the Barron’s piece highlights the fund’s involvement in the private space, that will not be encapsulated by this Public Ownership analysis.
Elephant in the Room
The obvious elephant in the room is the outperformance of the Biotech subsector against the broader market, an index which coincides with RA Capital’s investment domain. Even with that in mind, the fund’s stock selection alpha has taken off since 2012, generating simulated annualized returns of 65%, compared to 45% for the IBB’s and 27.6% for the S&P 500 Healthcare TR:
During this period, the fund made money on 63% of its stock picks, 67% of its capital, and an astounding
583bps of contribution for its average winner, as huge gains in securities such as ACAD, DYAX and ACHN generated spectacular return on invested capital:
The portfolio generated an astounding 44,400 bps of contribution, of which more nearly half can be attributed to security selection/trading:
Digging into Dyax, the fund’s second top grossing security over the period, and a security the Barron’s piece highlights, we can see how RA has opportunistically traded the security over time, publically intiating the position at less than $1.50/share all the way to a $26 share price some 4 years later. We model a $157.7MM return on the security, representing a 1,040% return on average capital:
The success of the fund has coincided with a sharp increase in assets under management (whether organic through NAV appreciation, or inorganic through fund flows):
Of course, the fund invests in small-stage clinical biotech companies, so the question is how scalable is their approach if one were to model liquidity constraints. The vast majority of their exposure continues to be with companies that average less than 1MM of daily volume, even at >1BN of deployed capital!
What this means is, the fund has less latitude with taking on large position-sizes simply due to volume constraint. The average exposure to positions greater than 5.0% of reported market value has gone for >80% of total exposure to ~40% over the last 5 years:
The fund’s current top 10 positioning represents more liquid investments than their non-core positions, albeit notable ownership of aggregate shares outstanding:
What must be on every investor’s mind is how a portfolio as concentrated with inherent optionality as RA Capital’s will fare if Biotechs correct their streak of outperformance, but the PM makes clear in the Barron’s piece that his fundamental approach towards security selection helps the portfolio manage exogenous risk. It is a fascinating portfolio to continue monitoring over time, and a historic run of outperformance.