The tech investor world was set alight with news that Michael Tuttle of Tuttle Capital received approval to open an exchange-traded fund betting against Cathie Wood’s Ark Invest Innovation Fund known by the ticker ARKK.
His fund seeks to profit directly from the inverse performance of ARKK using swaps. Tuttle says it’s nothing personal, but ARK Invest fans might see it as a pile-on. Given how poorly ARK Invest funds performed in general in 2021, it seems Cathie Wood’s woes show no sign of abating anytime soon. So is it time to short ARKK? Or is it too late?
Cathie Wood’s Track Record in 2020
It wasn’t too long ago that Cathie Wood was the darling of the financial world, with analysts marveling over her uncanny ability to pick winning stocks. The ARK innovation or ‘disruption’ funds (ARKK, ARKQ, ARKG and ARKF) were extremely popular in 2020 and the momentum continued into 2021.
In 2020, analysts reported Wood’s funds outperformed passive options by a wide margin. That was no mean feat given the S&P 500 rose by over 20% and followed up again in 2021 with an outstanding 28% return.
More Recent ARK Invest Fund Returns
However, investors have soured on the ARK’s collection of innovation funds.
Looking at the numbers for 2021, we see that ARKK was in the negative to the tune of double digit percentages (-23.56% to be precise). The change for ARKG, the ARK genomics fund, was even larger, with -30 percent+ return. ARKW virtually flatlined but also ended negative for the year.
The ARKQ fund is the only one with positive activity for 2021, and just barely at that, up 1.90%.
Collectively, it doesn’t look good for this set of investment funds that had been extensively hyped throughout 2020.
Time to Short ARKK?
Short activity on ARKK started long before Tuttle unveiled the SARK ETF. First, let’s take a look at ARKK’s meandering across the chart over a year.
Six months ago, ARKK stood at around $110. ARKK was around the same benchmark a year ago.
As for its current level, ARKK first crossed that rubicon on an upward trajectory in July of 2020. In short, anyone owning ARKK post-summer 2020 is flat or negative.
Betting Against Tesla
When you look into the holdings of the ARKK fund in detail, what you find is that shorts are betting against Elon Musk’s electric car company, which was a major Cathie Wood play that rose some 800 percent in 2020.
To say that Tesla did well is an understatement, but lots of seasoned traders feel that all of that growth can’t continue forever and they’re looking for a market correction on Tesla, which comprises about 11 percent of ARKK holdings.
That’s one major component of a trading strategy that would bet against the ARKK fund. Before Tuttle’s ETF debut, traders were already making put bids of tens of millions against the fund.
Short interest was reported at 11 percent recently, with $2.6 billion in assets against the fund, compared to total ARKK net assets of around $25 billion.
How to Bet Against ARKK
The ETF makes it a lot easier to short the Ark Invest flagship fund.
Of course, you could just buy short options on the market, but you would need to cover them accordingly.
Being able to bet on the chart activity makes the whole thing a lot simpler.
Is It Too Late To Short ARKK?
As we mentioned, there’s already a lot of short interest in the fund.
However, if you think that ARKK is due for a fall, it’s not too late to contemplate further decreases in fund value and returns.
That said, this is one of those investments that seems almost spiteful and analysts don’t have a lot to compare it to. It’s somewhat rare to see investors putting their money into a bet against a single fund, even one as polarizing and volatile as this one.
With that in mind, when making this type of trade, it can be helpful to think about what you’re basing it on. What indicates that the fund stands to keep the losing under the hundred-dollar mark? And who’s to say that Wood’s influence will continue to extend throughout the years to come? Many of these funds are notorious for pivoting after a loss and posting new gains.
In that sense, those who stood the most to gain from shorting ARKK shorted it at its greatest height, around $125.
Tesla and Bitcoin
There’s one more thing to think about here, too.
In its way, Ark’s major investment in Tesla is like a series of nested Russian dolls, in that Tesla continues to hold massive amounts of Bitcoin. One of the predominant trading philosophies behind shorting ARKK is the notion that as Bitcoin deflates on ecological questions or other challenges, Tesla and by proxy ARKK, will go with it.
Keep all of this in mind as you think about whether to short ARKK with SARK and how to factor this kind of play into an ongoing portfolio strategy.