• Introduction: Short Portfolios Cluttered with Bimodal Biotechs
  • Why Biotech Firms are Naturally Predisposed to Appear in Kailash Short Portfolios
  • Exclusion & Implications: Removing Biotechs Is a Win for SMID & SAGE 
  • Conclusions: Higher Returns & Lower Volatility for SMID & SAGE
  • WARNING: Today’s Decision is NOT a Totem on Timing, Biotech’s Appear Ripe for Reversal
  • Appendix: Large Cap Virtually Unchanged by Removal of Biotech

Summary Conclusion: Overall we find that for both the portfolio built by the bottom of the SMID rankings tool and the Kailash SAGE portfolios, removing the biotech names improves expected returns, reduces aggregate volatility, improves information ratios all while significantly reducing the odds of our partners experiencing catastrophic drawdowns. With that said, the decision to remove biotechs from the Kailash short books does NOT represent a fundamental call on the space. In fact, the Biotech names we will be excluding possess fundamental data of such poor quality one could easily imagine the names may be ripe for yet another pullback akin to the one seen post our negative report on the space on October 9, 2015.

Introduction: Short Portfolios Cluttered with Bimodal Biotechs

Over the years clients have approached us about the preponderance of biotech firms in the Kailash short portfolios. Their main issue seems to be an idea that shorting biotech firms is a difficult proposition and the tendency of the Kailash models to assign these firms poor ranks due to their frequent lack of financial metrics we tend to prioritize, such as profits and revenues, fails to take into account the unpredictable scientific factors that often drive biotech outcomes. We recognize that the bimodal outcomes associated with small biotech firms that are speculations on various breakthroughs make this issue valid; the solid historical performance of the Small & Mid Cap Short portfolios (see Figure1 below) shows that while we are sympathetic to those unwilling to short these biotechs, they should nonetheless be viewed like difficult-to-research lottery tickets with intrinsically negative payoff structures.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

October 28, 2016 |

Categories: White Papers

October 28, 2016

Categories: White Papers

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