Some view skyrocketing biotechnology stocks as a bubble, but hedge funds are riding optimism on companies in the sector to monster gains—for now.
Stock prices for biotech indexes stand at all-time highs, having gained more than 350 percent over the past five years, a rate that's more than triple the broader stock market.
Hedge funds have joined the party, piling into the relatively volatile sector. Top names owned by funds include large drug makers like Amgen, Biogen and Regeneron focused on creating medicine from living cells instead of chemicals. Investors have also cashed in on stocks like Synageva Biopharma, Dyax and Bluebird Bio, relatively small or unproven companies whose pipeline of products can get big returns if they make it to market with government approval.
Those bets have been money makers for private investors. Hedge funds that focus on biotech or invest in the sector as part of a broader health-care portfolio have produced average gains of 20.87 percent over the last five years, according to an analysis of 50 funds by Simplify, which tracks hedge fund return data and consults on risk management.
"It's an extremely hot sector for investing right now," said Simplify CEO Brian Shapiro.