(Bloomberg) -- David Witzke, a former money manager at Citadel, started his health-care focused hedge fund Avidity Partners Management with about $750 million in commitments, according to people familiar with the matter.
The Dallas-based firm, which was co-founded by former Highland Capital Management money manager Michael Gregory, began trading Nov. 1, said one of the people. Gregory, who oversees research at Avidity, led health care at Highland, and Witzke, the chief investment officer, ran one of the largest health-care portfolios at Citadel stock unit Surveyor Capital.
The startup comes in a difficult fundraising environment for hedge funds as investors bail out from the industry after years of mediocre returns and high fees. Some money managers with a proven track record have convinced investors to back their funds. The biggest startup of 2019 has been the $2 billion health-care and technology-focused Woodline Partners, which is run by former Citadel traders.
Avidity is also tapping the demand for specialists. Investor interest in health-care funds is trumping other industries, according to a July study by Goldman Sachs Group Inc. Investors are lured partly by performance: The health-care managers among Goldman’s clients posted average annualized returns of about 45%, without leverage, since the start of 2016.
Hedge Fund Clients Seek Masters of a Corner of the Universe
Volatility in health-care stocks has also put a premium on experts who can navigate the market. President Donald Trump has taken aim at drugmakers over costly medications while Congress deliberates pricing proposals. And “Medicare for all” reforms to health insurance have gained traction as Democrats gear up for the 2020 presidential election.
“Investors are definitely looking at health care and the view is they’re going to be better served in a long-short strategy due to the typical volatility you get in the space in an election year,” said Mark Doherty, head of research at hedge fund consultant PivotalPath. “There have also been a lot of companies that have come to the market in the last couple of years, and typically that gives you a lot of opportunities for short ideas.”
Health-care traders also benefit from the event-driven nature of the industry. It makes it harder for quants to flood the space and sap gains from fundamental stock-pickers, Doherty said.
Witzke has a Ph.D. in chemical engineering and spent more than a decade as a biotechnology analyst, first on the sell-side and later at hedge funds Ridgeback Capital Management and Citadel. He began managing money at Ken Griffin’s $32 billion firm in 2011, according to an investor presentation seen by Bloomberg.
During his eight years at Highland, Gregory held several management roles, including CIO of the firm’s alternative investment platform. He previously ran his own fund for four years, which was absorbed into Highland in 2010. Gregory has an MBA from a joint program among Yale University’s medical, management and public health schools.
The duo tapped several industry specialists to help come up with trade ideas, including former Citadel analyst Jay Cecil to focus on biotechnology and Highland money manager Andrew Hilgenbrink to focus on therapeutics, according to the presentation. The firm also hired another Citadel analyst, Jeff Knightly, to specialize in medical technology, tools and services.
Witzke and Gregory declined to comment.
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