Investors have fled US biotechnology shares this month, turning fund flows negative for the year to date as the Federal Reserve voiced concerns over high valuations in the sector.

Biotech has been a boom sector. Smaller companies on the cutting edge of research have attracted big sponsorship from investors hoping for a drug or medical breakthrough. They have potential to generate huge returns, but many fail.

Last week, the US central bank identified biotechs, small-caps and social media shares as a cause for concern, saying valuations “appear to be stretched”.

That triggered a 6 per cent slide in the Nasdaq biotechnology index, wiping $40 billion off the market’s value, before prices rose 3 per cent on Friday. The index is up 10.6 per cent this year and is 16 per cent above its low in April, when there was a valuation scare.

Investors were pulling money out of the sector before the Fed issued its warning, with the main exchange traded fund tracking the Nasdaq biotechnology index seeing $326 million leave over the past week, according to ETF.com.

Since the start of July, outflows from the iShares Nasdaq Biotechnology ETF, known as IBB, have reached $445 million, for a net decline of $77 million this year. That comes after an inflow of $747 million during 2013 when the biotech index surged 65 per cent. – Copyright The Financial Times Limited 2014