Discover more from The Bear Cave
🐻Special Edition: Will ARK Invest Blow Up?🐻
ARK's Lack of Liquidity May Become Exposed
One week ago, The Bear Cave wrote about potential liquidity issues at ARK Invest, the hot active management ETF firm founded by Cathie Wood. ARK has seen assets grow from around $10 billion to $60 billion over the last 12 months and ARK’s ETFs now own at least 15% of 11 different companies.
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.
Below is a table with ARK’s 13 most concentrated holdings. On average they were down 7.5% yesterday and down 9.5% today.
On Twitter jokes about front-running forced selling by ARK have gained traction:
This very much creates a self-fulfilling prophecy. Investors who see bad performance may sell ARK ETFs, stop buying ARK ETFs, or short ARK ETFs. This pressure can cause the ETF to trade below NAV, which leads to “redemptions” as ETF arbitrageurs exchange the ETF for the underlying holdings and then sell the underlying holdings. This leads to further bad performance. (Read about how ETF arbitrage/redemptions work here.)
The Wall Street Journal wrote about liquidity problems at ARK three weeks ago. In the article Cathie Wood said that in a downturn she would sell liquid holdings, like ARK’s Tesla and Roku, to buy and support illiquid holdings:
“In an interview, Ms. Wood says that as markets rise, ARK diversifies into larger companies. They form a kind of war chest that ARK can tap into ‘during downturns, when our less-liquid stocks will be hit disproportionately, giving us better bargains,’ she says. In other words, ARK counts on being able to sell some big stocks to buy smaller ones when those become even cheaper—as it did successfully during last year’s severe bear market.”
That is a bad idea. By selling liquid holdings to support illiquid holdings ARK is becoming more illiquid. That is what U.K.-based fund Woodford Capital did before suspending redemptions and closing.
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.
ARK Invest has no chief risk officer on its website. ARK’s chief operating officer is Tom Staudt. According to Mr. Staudt’s LinkedIn, prior to joining ARK, he was the account executive at WILX-TV, a local station for Lansing, Michigan. ARK is known for hiring employees with non-traditional backgrounds.
ARK sends out daily emails with its buying and selling and someone even made an app to track ARK’s trades:
This is problematic because any actions taken by ARK will now work against them. If ARK starts selling a big holding, retail may bail and predatory shorts will pounce. This may cause further declines in whatever security ARK tries to sell.
Last night, ARK issued a correction to its “latest trades” email because the firm mistyped one of the ticker symbols. Worst of all, ARK seems indifferent to its illiquidity risks. For example, last week, ARK initiated a position in Vuzix (VUZI), a $900 million small tech company that is up around 1,000% over the last 12 months.
Just yesterday, ARK’s Genomic Fund (ARKG) bought another 122,000 shares of Surface Oncology (SURF), a $350 million cancer drug company. ARK now owns around 9% of the company.
ARK should be treating the situation as a four-alarm fire. Instead, it is just business as usual.
The next 48 hours will play a big role in determining what happens next. If things don’t change, Cathie’s ARK may sink.
Follow @StockJabber on Twitter for updates.
If this email was forward to you please consider joining The Bear Cave newsletter with the link below.
The Bear Cave also launched a second newsletter, Comment Letter King, that provides a free weekly recap of interested SEC comment letters. Check it out with the link below.
Until next week,
The Bear Cave