It's Time to Trust Your Biotech Portfolio

"We're hedged, but still, this market hurts," said another biotech hedge fund analyst. "Small-cap shorts have been going against us, while our bigger cap longs have not been performing as well."

The Nasdaq Biotechnology Index, or NBI, a broad measure of the sector's performance, was up 1.5% last week, beating the overall market. At one point Thursday, the index was up 5%. For the year, the NBI is essentially flat.

The reason for the extreme day-to-day moves in stocks like Myriad Genetics is hard to pinpoint, but many market observers lay the blame on the trading desks of the large hedge funds using quantitative, computer-driven, trading strategies.

"Quant funds have been getting killed this summer, so they're being forced to unwind long and short positions," said a biotech hedge fund portfolio manager.

His advice on how to handle this market is simple: Know what you own and don't let the volatility drive you crazy. This mantra, in various forms, was repeated over several conversations Friday with several biotech fund managers.

The biotech sector -- and much of health care overall -- is seen as a defensive play against worries over a liquidity crisis in the economy. Credit crunch or not, people still get sick and they still need drugs. Plus, biotech and drug companies tend not to pile on large amounts of debt.