Monday, March 30, 2009

Hedging the Future of the FDA?

A little while ago, we discussed the Obama administration's nomination for Commissioner of the US Food and Drug Administration (FDA), Dr Margaret Hamburg, focused on her current position as a director of Henry Schein Inc, a large distributor of medical products, including drugs and devices. There is another aspect of her nomination worthy of discussion, but which has not been publicly discussed. It has appeared almost as a footnote in a few reports of her nomination. For example, at the end of an article in the Chicago Tribune,

Hamburg is married to Peter Fitzhugh Brown, an artificial intelligence expert who is executive vice president and director of Renaissance Technologies, a privately owned hedge fund.

In this time of financial meltdown, hedge funds are more frequently mentioned in the press. Hedge funds are a relatively new, and generally opaque presence in the financial world. Hedge funds apparently buy and sell stocks, bonds, commodities, financial instruments, and use a variety of investment strategies. Since health care accounts for over $2 trillion of the US economy, it seems possible that hedge funds might be involved in stocks, bonds, and the finances in general of health care corporations. We therefore wondered Mr Brown's position at the hedge fund management company Renaissance Technologies might have something to do with health care, particularly with health care corporations that make products regulated by the FDA. It turns out that this question has no simple answer.

Hedge funds are often described as secretive and lightly regulated. This seems accurate, as it is not easy to find out much about their operations, strategy, holdings, or leadership. My usual Google searching tricks did not turn up much useful about Renaissance Technologies.

Most helpful was a 2008 article in Bloomberg News, which labeled the company as "the world's largest hedge fund manager." It was managing $35.4 billion in assets in September, 2007.

The Bloomberg reporter's attempt to find out something about the company's strategies was a failure, summarized by his conclusion, "nobody knows precisely how the firm makes its millions." When the funds founder, Jim Simons, was asked what he can say about his trading strategy, he answered, "not much." The instruments he trades? - "everything." The strategies he uses? - "a lot."

The only publicly available information about the company's holdings is in its 13F filings with the US Securities and Exchange Commission (SEC). The 2009 filing, covering 2008, is here. The filing only covers long stock holdings at the end of the year. Lacking a research staff, I have not been able to go through the voluminous report in detail, but do note that the company at times invested in health care corporations from A ([Abbott Laboratories, valued at $88,909,000) to Z (Zimmer Holdings, $7,858,000).

I had little luck finding out the role of Mr Brown within the company, and whether he has any personal responsibility for making decisions about investments in any health care corporations. But I did find that a prominent Renaissance Technologies fund, the Medallion Fund, worth $6 billion in July, 2007, is owned mostly by Renaissance Technologies employees, presumably including Mr Brown, not outside investors, "Medallion stopped taking new money from outside investors in 1993 and returned pretty much the last of their capital 12 years later. Today, the fund is run almost exclusively for the benefit of the Renaissance staff." Furthermore, most of Renaissance Technologies is now owned by its founder and a few top officers, including in particular, Peter Fitzhugh Brown, who the Bloomberg article reported as owning "5-10 percent."

So, does Mr Brown's position in and partial ownership of Renaissance Technologies amount to a conflict of interest with respect to his wife's proposed position as Commissioner of the FDA? It is not clear. Mr Brown works for a company that manages billions of dollars, and likely a good chunk of that money is invested in instruments related to health care corporations. Mr Brown now presumably a goodly number of shares of the company's premier fund, and owns a substantial minority interest in the company as a whole. Hence he indirectly probably owns a substantial amount of such instruments. Whether he has any direct decision making responsibility for the buying and selling of such instruments is unclear.

Therefore, it seems that Dr Hamburg actually has a "potential conflict of interest" arising out of her husband's role in Renaissance Technologies. In academic conflict of interest policies, that phrase often appears without a definition, perhaps to soften the words so often applied now to medical academics. But this seems to be a real instance in which it should be used.

The shadows cast by the increasing opacity of the world of finance, now dominated as never before by organizations such as hedge funds that control large pools of investment about which regulations compel little disclosure, now seem to be darkening health care.

In my humble opinion, the Senate hearings on Dr Hamburg's confirmation ought to determine whether this potential conflict is more than that. Furthermore, we need a broader dialogue about how to dispel the shadows and secrecy that the dark arts of finance have spread to health care.

1 comment:

Anonymous said...

The nature of hedge finds are to employ various strategies, depending on the area being invested in, or the nature of the industry. The one consistent in most hedge fund investments is the use of leverage. The recent financial melt down highlighted the double edge nature of leverage as companies that had taken positions were suddenly required to pay out various multiples of their original investment.

A common vehicle for those entering government service is to place their investments in a blind trust. That is, the person has no knowledge of their investment positions at any given time. This would be virtually impossible given the nature of a hedge fund and the apparent large value of the holdings.

One consistent in today's financial advice is the belief that medicine will continue to be a driver in the economy. There is a total disconnect between the amount, as a percentage of GDP we spend on medical care and outcomes, and the amount spent by other countries. While questions are being raised about investing in certain companies, mostly pharma, the general feeling is that medicine will continue to grow.

My personal belief is that we are entering a bubble period for medicine. Questions were raised in the March 18th WSJ article Medical Device Makers Face Health-Care Reform Pressures about continuing product margins. In recent days we have seen calls from Europe to lower our deficit spending and not repeat the mistakes they made in the 1960s.

Certainly having a spouse involved in the fast paced investment world of a hedge fund, given the coming volatility of medical investments, would be a direct conflict.

Steve Lucas