The health care sector was a popular one in the third quarter for hedge fund managers looking for merger-arbitrage opportunities. Takeover targets like Kinetic Concepts, Cephalon and Medco Health Solutions ( MHS) were snatched up during the quarter, increasing health care weightings for several hedge fund managers. The merger activity is one way to explain the strong performance of the health care sector this year. Health care names in the S&P 500 are up 6.1% overall, according to Capital IQ, the second best sector performance this year. The outlook for health care stocks, though, leaves plenty to be desired. After notching only 7% earnings growth in the third quarter, analysts are only calling for 5% earnings growth for the sector in 2012. In addition, health care companies will be in limbo as President Obama's health care reform bill gets challenged in the courts. If they weren't playing M&A activity in the sector, hedge fund managers were selling for the most part. Pfizer ( PFE) was a popular name to sell, with David Tepper's Appaloosa Management and David Einhorn's Greenlight Capital reducing their holdings in the drugmaker. Tepper also sold shares of fellow drug stock Merck ( MRK), as well as Medtronic ( MDT) and UnitedHealth Group ( UNH). Elsewhere, Steven Cohen's SAC Capital sold out of Dendreon ( DNDN), which had been one of the hedge fund's largest holdings before the stock crumbled. Cohen's fund also sold shares of Tenet Healthcare ( THC), Express Scripts ( ESRX) and Novartis ( NVS), among others. Meanwhile, both Blue Ridge Capital and Omega Advisors cut their holdings in Teva Pharmaceutical ( TEVA), although that may be due to the fact that the company's shares fell very sharply in August.