Cathie Wood’s Bloated ARK Forges Forward

We’ve been documenting Cathie Wood’s adventures in active management over at ARK Invest for the better part of the last year and a half now.

What started as a look into how the law of large numbers and Wood’s popularity presented numerous pitfalls back in December 2020 has now become something of a financial world soap opera, with many observers watching ARK funds extremely closely as the NASDAQ teeters on the brink of a fever pitch and Tesla hits a patch of rocky road in China.

Most recently, we’ve written about Wood for several reasons: the first is that she was backed by Bill Hwang, who was at the helm of the massive Archegos Capital blowup that singlehandedly pasted numerous equities to the tune of more than 50% each, while also doling out a multi-billion dollar loss to Credit Suisse and other counterparties caught “holding the hot potato”. The link drew obvious comparisons, although we’re certain Wood isn’t employing the insane leverage that catalyzed Hwang’s blowup.

The second is because the launch of her newest actively managed “Space Exploration ETF” has included some curious names. For example, it owns names like John Deere, which many find curious, while excluding space exploration pure plays like Maxar. 

does anybody know Cathie Wood or her analysts?

could you please ask her why $MAXR not in her Space ETF $ARKX — it’s the only pure play with free cash flow

— Special Situations (@rosemontseneca) April 21, 2021

But something else is going on that has piqued our curiosity as of late. Wood’s actively managed style seems to be drifting further away from risk-adverse and closer to just “risk”. Sure, we have pointed out in the past Wood’s propensity to sell large, liquid tech names like Microsoft in favor of buying speculative early stage names like Workhorse and Vuzix. 

And now people are also pointing out that ARK’s funds have been taking sizeable stakes in other ARK funds. ARK’s Space Exploration ETF now owns 7.2% of ARK’s 3D printing ETF, for example.

$ARKX ARK “Space Exploration” ETF now owns 7.2% of the ARK 3D Printing ETF. Has anyone been able to tease a reason out of these clowns as to why they are supposedly doing this? pic.twitter.com/L642wrkR4M

— Keubiko (@Keubiko) April 23, 2021

Additionally, Wood has also already amassed a several hundred million dollar position in the newly listed Coinbase IPO, which is down almost 20% from its $350 reference price when it listed. Despite your take on crypto, it’s tough to deny that piling into a sizeable equity position based mostly on super-volatile cryptocurrencies is a risk adverse strategy. 

And this has caused many on FinTwit to think about the feedback loop that is slowly determining whether or not ARK funds see success. This diagram appeared over the weekend, and shows exactly how – should inflows into ARK funds slow or reverse – their intrinsic value could collapse.

At some point if inflows stop or reverse, these stocks that have been walked up far past their intrinsic value could collapse as no buyers are willing to step in and buy them at their inflated valuations. We saw some of that in March, as many arkg names had dramatic collapses.

— Andreas Hansen (@aadhansen) April 25, 2021

Not unlike the Allied Capitals of the world, ARK looks more and more like a BDC marking its own book up as the cycle continues to feed off itself. The further along the cycle gets, the easier it becomes for a pin to prick the entire bubble. 

The question then turns to how much further ARK wants to “push it” and – not unlike the overall market which is seeing record levels of margin debt…

The market is at all time highs while margin debt has increased by record levels.

This is a lurking disaster. pic.twitter.com/TMMD8InvH8

— Nate Anderson (@ClarityToast) April 24, 2021

…how big the bloodbath could wind up being if the stock market decides to buck the Fed and simply decide “enough is enough”, before puking up all of the malinvestment that has taken place over the last decade.

But for now – maybe for one more day, one more week, or maybe even another month, Cathie Wood’s ARK forges forward.