Cathie Wood's ARK Hit By Record Outflows, Sold Apple To Catch Falling Knife In Tesla Tuesday

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by Tyler Durden
Wednesday, Feb 24, 2021 - 07:09 AM

We would be remiss to mention the turmoil that the NASDAQ has been under for the last couple of sessions without mentioning everyone's favorite "visionary" tech investor, Cathie Wood at ARK Invest. With more than $50 billion in ETF AUM, up from $3.6 billion this time last year, Wood has been featured almost non-stop in financial media as the next revolutionary asset manager. She was even given the nickname "money tree" in South Korea. Here on Zero Hedge, we have been writing extensively about how the law of large(r) numbers could make life difficult for Wood's ETFs heading into the new year.

But one thing Wood hasn't had to deal with over the last 18 months during her meteoric rise has been a serious sell off in Tesla. And, over the last few sessions, Tesla - one of the main driving forces behind Wood's investing "genius" - has fallen about $100, or about 10%. At the same time, Bitcoin - another asset with numerous ties to Wood's portfolio and positions - fell more than 20% peak to trough. 

Heading into Tuesday, the fund's flagship ARKK ETF had already experienced its worst back-to-back fall since September 2020, according to Bloomberg. The ETF finished lower by another 3.3%, recovering some of its losses on Tuesday, after plunging almost 10% at the cash open. ARK's Genomic Revolution and Ark Innovation funds had lost a combined $4.3 billion heading into Tuesday's session, Bloomberg noted. 

And as ARKK fell again on Tuesday, fund outflows swung lower by $1.3 billion. 

On Tuesday, we were eager to see the update in ARK fund flows.

And with good reason. Investors pulled $465 million from the ARK Innovation ETF and $202 million was pulled from the ARK Genomic Revolution ETF, according to Bloomberg. The ARK Next Generation Internet ETF saw a $119 million outflow. 


Compounding the shellacking for ARK Funds on Tuesday was the news that EV company Workhorse was not going to be receiving a much-coveted multi-billion dollar contract from the U.S. Postal Service.

Workhorse was rumored (and widely expected judging by the price reaction) to be in the running for the contract, which was a frequently touted piece of the bull case by investors. On the news, Workhorse shares plunged by over 50% and were halted 5 times before the close on Tuesday.

Several short sellers had targeted Workhorse over the course of the past year, noting that the USPS contract was unlikely. Among those was Nathan Anderson's Hindenburg Research, who predicted that Workhorse shareholders would be in for a "reality check" when the details of the USPS contract were finally released. 

Compounding the wonderful week for ARK even further was 3D Systems, the second largest holding in ARK's 3D printing ETF (why does this even exist?), who announced on Tuesday afternoon that it had "discovered certain internal control deficiencies" and, as a result, "may report one or more material weaknesses in internal controls in its upcoming fiscal 2020 Annual Report on Form 10-K."

What to do during these troubling times, after Tesla has almost singlehandedly driven all of your "success" over the last 18 months and has ballooned in market cap about 10x without any major material fundamental developments that would warrant such a run higher?

Buy more Tesla, of course. After the trading session on Tuesday, the headline hit that ARK Funds had tried to catch the falling knife in Tesla, purchasing more than 240,000 shares on the session. Tesla, at its closing price of $698 per share, was still valued at a market cap of $670 billion at the end of the day. The company's ARK Innovation ETF bought 177,214 shares, while ARK Autonomous Technology & Robotics ETF bought 11,893 and ARK Next Generation Internet ETF purchased 51,441, according to Bloomberg.

But an even further examination of the day's trading revealed a larger trend: ARKK sold off some of its most liquid, relatively risk-adverse positions (at least relative to the tech industry) to not only add Tesla, but also to add to another former short seller target Vuzix Corporation, which had been alleged to be a stock promotion in 2018, and is now trading about 20x higher than it was in March 2020. 

And so ARK's fund management happens to look more like a novice trader trying to catch a falling knife this week. As was suggested during the day on Tuesday, we wouldn't mind seeing the due diligence file not only on Workhorse, but also on Vuzix.

You might be saying to yourself: they have $50 billion under management. Certainly they have enough money to hire at least a couple of competent analysts to at least do basic due diligence on their positions before staking claims in them, right? 

Doubts about Wood's stock picking acumen seem to be growing. Short bets against ARK continue to rise - a trend we first pointed out that had started weeks ago. 

We noted several weeks ago that short interest in ARK funds had "exploded" after ARK's banner 2020. Short interest as a percentage of shares outstanding for the firm's flagship $21 billion ARK Innovation ETF spiked to an all time high of 1.9% from just 0.3% two months ago, according to data from IHS Markit Ltd. and Bloomberg.  That number now stands at nearly 3.5%, as evidenced in the chart above. 

We were one of the first to highlight how the law of large numbers could eventually stand in the way of Cathie Wood's success.