Investing in Biotech with Verdad Capital

Why It Matters

By turning specialist fund ownership into a quantitative signal, Verdad offers investors a repeatable, low‑correlation edge in biotech—a sector traditionally avoided by value quants, potentially reshaping small‑cap portfolio construction.

Key Takeaways

• Biotech comprises ~25% of Russell 2000 small‑cap universe.
• Specialist fund ownership strongly predicts biotech stock outperformance.
• Companies with zero specialist owners tend to underperform dramatically.
• Verdad’s quantitative model uses specialist concentration relative to total fund owners.
• Strategy emphasizes higher returns with lower volatility via frequent rebalancing.

Summary

The Yet Another Value podcast featured Verdad Capital’s Dan Rasmmanson and Greg Obachen discussing their new research paper on quantitative, value‑oriented investing in biotech. The duo explains why biotech, despite representing roughly a quarter of the Russell 2000, is routinely omitted from traditional screens because most firms are loss‑making, yet it offers a sizable, low‑correlation source of return for small‑cap investors.

Verdad’s core insight is that ownership by sector‑specialist funds serves as a powerful alpha signal. Their data shows that biotech stocks held by multiple specialists consistently outperform, while those with no specialist ownership generate near‑zero returns. The model quantifies this by measuring specialist concentration relative to the total number of funds owning a stock, using a definition of specialists as funds with more than 50% of assets in biotech—about 70 such funds in their dataset.

Greg notes, “Specialists act like a voting machine; consensus matters,” and Dan adds, “If sector specialists own none of it, returns are basically zero.” They also observe that specialist‑owned companies are often acquisition targets, which drives higher returns and lower volatility. The approach relies heavily on 13F filings to track specialist positions, with frequent rebalancing to capture shifting ownership patterns.

For investors, the research provides a systematic framework to capture biotech’s upside while mitigating risk, delivering higher risk‑adjusted returns. It also suggests a broader methodology: leveraging specialist ownership signals in other niche sectors could unlock uncorrelated alpha for value‑focused portfolios.

Original Description

Dan Rasmussen and Greg Obenshain of Verdad Capital discuss their white paper on quantitative investing in biotech. Topics include why biotech’s complexity makes it attractive for systematic investors, how specialist fund ownership serves as a quality signal, and why insider buying and spending-based valuation metrics can outperform traditional financial analysis. The conversation also examines momentum within therapeutic categories, risk management on the short side, and how diversification and rebalancing help address biotech’s event-driven volatility.

Verdad paper on investing in biotech: https://t.co/JZ1uDURDG2

[00:00:00] Introduction to biotech quant paper

[00:02:53] Why biotech attracts value investors

[00:05:07] Specialist ownership as quality signal

[00:08:24] Defining biotech sector specialists

[00:11:29] Acquisition patterns and return drivers

[00:19:37] Managing short risk in biotech

[00:23:06] Short interest as negative signal

[00:27:38] Insider buying predictive power

[00:32:44] Spending-based valuation framework

[00:40:21] Classifying biotech by clinical trials

[00:45:34] Momentum within therapeutic categories

[00:48:23] Events versus underlying return drivers

[00:51:34] Verdad’s contrarian investing philosophy

Links:

Yet Another Value Blog - https://www.yetanothervalueblog.com

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Production and editing by The Podcast Consultant - https://thepodcastconsultant.com/