Wall Street’s next bet: Cures for rare diseases — Andrew Lo

MIT Sloan Professor Andrew Lo

MIT Sloan Prof. Andrew Lo

From Fortune

What if I told you about an investment fund that diversifies your portfolio, shields you from fluctuations in the stock market, and earns double-digit returns? Sounds interesting, right?

Did I mention that this investment also creates potentially life-saving treatments for deadly rare diseases?

This fund doesn’t exist — at least not yet. I’m cautiously optimistic, however, that in the near future we’ll see the launch of an orphan disease “mega-fund” that finances early-stage biomedical research and drug development and is also a tidy investment.

It works like this: The fund pools a large number of drug development efforts into a single financial entity or “mega-fund.” With the lower risk that comes from investing in multiple drug trials simultaneously, the fund yields a more attractive risk-adjusted return on the investment and a higher likelihood of success in finding cures for diseases. This, in turn, enables the fund to raise money by issuing “research-backed obligations” or RBOs, bonds guaranteed by the portfolio of possible drugs and their associated intellectual property. Because RBOs are structured as bonds, they appeal to fixed-income investors, who collectively represent a much larger pool of capital and who have traditionally not been able to participate in investments in early-stage drug development.

Read the full post at Fortune.

Andrew W. Lo is the Charles E. and Susan T. Harris Professor at the MIT Sloan School of Management and director of the MIT Laboratory for Financial Engineering.

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