Catherine “Cathie” Wood was named the best stock picker of 2020, but now it seems the markets are turning on her.
She is the founder, CEO and CIO of investment management firm Ark Investment Management, the largest actively-managed exchange-traded fund in 2020. Ark specializes in investments in disruptive innovations.
Short sellers and bears are saying the star fund manager’s bubble fund could burst soon.
When an investor borrows shares of the company, the short seller then quickly sells the borrowed shares into the market. Short sellers hope that the shares will fall in price. The shares are bought back and the short seller returns the shares to the lender, making a profit by pocketing the difference. A bear, meanwhile, is an investor who believes that a particular security or the market is headed downward and may attempt to profit from a decline in stock prices.
Short sellers and bears are circling around Ark. It’s been a rough week for Ark as its flagship exchange-traded fund looked set for the fifth day of declines as of today.
The Ark Innovation exchange-traded fund (ETF) was down more than 2 percent in premarket trading as of 8:02 a.m. today in New York, Bloomberg reported. The fund declined 15 percent this week through Thursday, Feb. 25, amid a tech selloff triggered by rising bond yields. An ETF is a basket of securities that trade on an exchange, just like a stock. ETF share prices fluctuate all day as the ETF is bought and sold, according to Investopedia. ETFs are different from mutual funds that only trade once a day after the market closes.
Twitter took note of Wood’s troubles.
‘Damn.. even Cathy Wood is hurting :/,” one person tweeted.
Another noted how opinions changed quickly about Wood: “Funny how Cathy was a genius until yesterday, now everyone says she’s just been Lucky…”
Another put a nail in her coffin: “RIP..Cathy”.
This isn’t the first time Wood has had a bad run. Almost a year ago, during the worst of the covid-19 pandemic economic upheaval, things weren’t looking good for Ark. But now her main fund is 11 times larger than it was in early 2020. Yet it is currently close to erasing its gains for 2021 after soaring as much as 26 percent since the end of December.
“They have had some great recent picks, but the hype, attention, and inflows are probably unsustainable,” said Mike Bailey, director of research at FBB Capital Partners. “There’s plummeting share prices for some of Ark’s high-profile holdings, combined with withdrawals from the Ark funds, plus I understand there is a surge in put options against the fund. It’s tough to fight the tide when these are going against you.”
During trading on Feb. 24 alone, investors pulled about $200 million from the fund. “That brings total weekly outflows to $638 million, on pace to be the worst on record,” Bloomberg reported.
Bearish bets against Ark’s ETF are growing, with short interest now accounting for more than 4 percent of available shares.
Things have changed drastically for Wood and Ark, which has seen assets grow from around $10 billion to $60 billion over the last 12 months. ARK’s ETFs now own at least 15 percent of 11 different companies, The Bear Cave reported.
So why are there worries of the Ark bubble blowing up?
“Ark’s illiquid holdings are problematic because if Ark ever faced outflows or the threat of potential outflows, hedge funds could take predatory short positions in Ark’s illiquid holdings and create a performance death spiral. A review of Ark’s illiquid holdings shows that could be happening,” The Bear Cave reported.
Three weeks ago, Wood told the Wall Street Journal she had a plan. In a downturn, she said she would sell liquid holdings, such as Ark’s Tesla and Roku, to buy and support illiquid holdings.
But some say this is a bad idea. “By selling liquid holdings to support illiquid holdings, Ark is becoming more illiquid…The hedge funds that may attempt to blow up Ark have more patient and sophisticated capital than Ark’s retail base. The strategy of getting more illiquid for temporary support won’t work,” The Bear Cave reported.
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On top of this, a 20 percent decrease in Tesla shares over the past three weeks — the biggest holding of the exchange-traded fund Ark set up by Wood — triggered a rush among investors to sell some of their holdings.
The portfolio risk level of the Ark Innovation ETF currently ranks well above average on 10 of the 11 factors in Morningstar’s Global RiskModel, Reuters reported.
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