Stockholm (HedgeNordic) – A focused, concentrated portfolio offers a much higher chance of beating the market, but high concentration also carries substantial risks. Max Mitteregger’s unconventional investing approach – characterized by high portfolio concentration, bearish stance on equities, high variability in net market exposure, and active risk-taking in biotech stocks – has not paid off so far this year for his long/short equity fund. Mitteregger’s Gladiator Fond is down 33.3 percent in the first seven months of 2021 after booking a loss of 17.9 percent in July alone.

“Unfortunately, the fund had a very weak development during July and fell 17.88 percent.”

“Unfortunately, the fund had a very weak development during July and fell 17.88 percent,” writes Mitteregger in a monthly update to investors. “There are several reasons behind the extremely weak development,” adds the Stockholm-based money manager, pointing out that the largest negative contributor was Swedish biotech Oncopeptides. In late July, the U.S. FDA issued a safety alert citing trial data showing an increased risk of death associated with Pepaxto, the company’s only marketed drug, used in combination with dexamethasone to treat multiple myeloma. Earlier that month, the FDA put a partial clinical hold on all clinical trials of the biotech company’s multiple myeloma drug candidate after trial data found large differences in overall survival in pre-specified subgroups.

The share price of Oncopeptides decreased by 54 percent during the month of July. “After an unclear and much-debated study result,” the share price of Oncopeptides continued to drop in July, writes Mitteregger. However, Gladiator Fond increased its stake in Oncopeptides during the month, “as I believe that the negative price movement has been overexaggerated, with a large more detailed study data coming in early September,” writes the fund manager.

“I believe that the negative price movement has been overexaggerated, with a large more detailed study data coming in early September.”

Gladiator Fond performed strongly in the post-financial-crisis period, partly due to Mitteregger’s skill at identifying high risk-reward opportunities in the biotech space. “I need to make some big bets to generate good returns,” the portfolio manager told HedgeNordic in 2019. “If everyone is saying a biotech’s value can go to zero, but I see a 75 percent chance of making four times the investment, I can afford to allocate six or seven percent of capital to that bet.” In 2021 and July in particular, the biotech-focus has detracted from the fund’s performance.

In July, two other biotech stocks detracted from Gladiator Fond’s returns. “Another of the fund’s large holdings (Camurus) came with a slightly weaker report but maintained its full-year forecast,” writes Mitteregger. Even so, the share price of the Swedish research-based pharmaceutical and biotechnology company fell by about 16 percent. “Hansa Biopharma fell 23% during the month without any major news (the holding was sold in July) and the fund’s largest holding, Astra Zeneca, fell by 4%,” adds Mitteregger.

“During the year, the fund held a number of short positions which, despite extremely high valuations, continued to rise.”

Gladiator Fond tends to maintain a concentrated portfolio of about ten long positions and reduces the market exposure mostly with OMX30 futures or put options on the index, in addition to a few individual short positions. Mitteregger’s short positions in 2021 have not paid off either. “During the year, the fund held a number of short positions which, despite extremely high valuations, continued to rise,” says Mitteregger. “During July, for example, EQT rose by 30% (up 96% on the year) and Balder 10% (up 65% on the year), also the other short-term holdings that the fund has went up in July.”

Concentration: A Double-Edged Sword on HedgeNordic.