Hedge funds are ditching MBAs for MDs

Hedge funds’ hottest new recruiting classes aren’t coming from business schools and investment banks; they’re coming from… hospitals. Earlier this week, Reuters reported that hedge funds including Balyasny, D.E. Shaw, Point72, Schonfeld, Qube, and Squarepoint are hiring “doctors, scientists, and analysts” to give expert insights on pharmaceutical stocks.

All companies experience volatile moves based on good and bad earnings reports, but the stock prices of pharmaceutical companies, specifically, can double or collapse depending on drug-trial performances. Hiring doctors with domain expertise, therefore, can be incredibly lucrative for hedge funds if it helps them place bets before drug-trial results are released.

A good example: on November 25, Cassava Sciences announced that it would stop all trials of its Alzheimer’s disease drug after it failed a late-stage study, sending the stock down from $26.48 on Friday, November 22, to $4.30 on Monday, November 25. Data from the study showed that volunteers who took the drug in the company’s phase 3 trial performed no better in cognitive or everyday-life activities than volunteers on the placebo.

If an investor had shorted SAVA on Friday, they could have netted a return of over 80% on Monday when the results were released. Interestingly, Martin Shkreli, the infamous “pharma bro” who was sentenced to prison for securities fraud in 2017, published a 38-page paper on why simufilam, Cassava’s drug, couldn’t possibly work, and he predicted that the stock would trade to the company’s cash value of $2 to $3 per share.

Regardless of your opinion on Shkreli’s past business practices, the man knows biotech stocks better than most. He has spent the better part of his career 1) shorting biotech stocks while working for/running hedge funds, and 2) managing pharmaceutical companies, giving him detailed domain knowledge. Anyone who read his report and shorted the stock accordingly would have made a lot of money. Not bad!

It’s no surprise, then, that hedge funds have decided to try to capture some of this alpha. I imagine it’s a pretty easy sell. You just approach doctors who have been on the operating table for a few years and say, “Hey, we’ll pay you ___ million dollars to help us figure out which of these pharmaceutical trials are legit and which ones are fake.” If you’re a doctor who is tired of the grueling schedule in the operating room, doesn’t want to deal with the ins and outs of the healthcare system, and would like a (likely) pay increase, it’s kind of a no-brainer, no? Plus, it’s probably a good culture fit:

“‘The prospect of falling rates has seen multi-strategy hedge funds ramp up their hiring in healthcare,’ Freddie Stacy, co-founder of recruitment firm Sheridan Executive, said…

‘Ex-doctors are attractive because if you can deal with the kind of extreme trauma seen daily by the medical profession, you can certainly handle draw-downs on a trading floor.’”