The Big Innovation Short

The Big Innovation Short
Reda Farran, CFA

over 2 years ago1 min

Cathie Wood’s flagship fund – the ARK Innovation ETF (ARKK) – lured in billions from retail investors in the past year after her thematic tech-focused bets trounced the market in 2020. But the fund is struggling to maintain that momentum and is down more than 5% this year compared to a near 20% rise for the US stock market as a whole.

That poor performance, coupled with concerns about lofty valuations among the fund’s stock holdings, has pushed investors to pull close to $1.5 billion out of the fund since the start of July. It’s also starting to attract short sellers betting against the fund, with $1 billion worth of shares sold short as of this week.

Among the most high-profile short sellers of ARKK is Michael Burry, the hedge fund manager who correctly predicted the 2008 subprime mortgage crisis and inspired The Big Short film. According to recent filings, Burry owns around $30 million worth of put options against ARKK that would net him a profit should the price of the ETF fall below a specific, undisclosed price.

For her part, Wood has hit back at Burry, saying “he does not understand the fundamentals that are creating explosive growth and investment opportunities in the innovation space”. Wood also holds the view that China’s increasing crackdown on its tech industry increases the appeal of the sort of US tech stocks she’s invested in. ARKK has no exposure to any Chinese stocks after dumping them in July amid the country’s intensifying crackdowns.

Let’s see how the Burry vs. Cathie saga plays out. Perhaps it’ll inspire another blockbuster Hollywood film in the future…

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