Skip to main content

This happens despite being a relatively expensive fund to short: the financing rate stands at around 5% (via data from S3 Partners). Now that compares to just 0.3% for the Invesco $QQQ (that tracks the Nasdaq 100 Index) which has fallen by over 6% so far this year.

Screen Shot 2022-01-18 at 3.05.40 PM

Let's look also at the Top 10 ARKK holdings and their Short Interest (ZOOM data not available, replaced by PATH as the 11st position): overall trending lower during the past 3 years and lately with a tilt for a higher short interest.

Screen Shot 2022-01-18 at 5.45.06 PM

Now is there another way out there to bet (or hedge) against ARKK besides the regular short selling? Yes, the SARK ETF which bets against ARK (via swaps) and gathered a total of $133M AUM (Assets Under Management) since the Nov 8 launch, with almost $30M inflows in just the first week of 2022. Unlike I read quite some online, no, it's not free or cheaper to short ARKK via SARK, it is not at all a back door to avoid the 5% or more short financing rate. It is quite likely more expensive: in a total equity swap, SARK is the receiver and the Primer Broker (whomever that is) is the payer. SARK pays a credit spread on top of the SOFR rate. With volatility around, ARKK sensitive to rates (long duration play), spreads cannot be cheap and SARK carries interest rate risk with the floating SOFR rate (unless they hedge which means more expenses ... passed on to the short investors/short sellers). Also, let's not forget the 0.75% ER (expense ratio) that ARKK has. All this can turn back really fast on the short sellers ...https://www.bloomberg.com/news/articles/2021-07-30/anti-ark-etf-to-bet-against-cathie-wood-s-flagship-fund

Screen Shot 2022-01-18 at 5.45.15 PM

Now let's put both into one chart: SARK+36% ARKK -31% since November 2021.

Screen Shot 2022-01-18 at 5.45.22 PM

Federal Reserve’s more aggressive pivot triggered Treasury yields higher, hence impacting Ark & overall growth/tech stocks given their long duration characterstics. US interest rates during the past 3 years:

Screen Shot 2022-01-18 at 5.45.30 PM

Specifically, ARKK finished 2021 24% lower after surging nearly 150% in 2020 with a return from January 2020 to Jaunary 2022 of 62% which is still a great one.

Screen Shot 2022-01-18 at 5.45.41 PM

Now a valuation note is fully worth it to be brought in: median ARKK P/S (Price/Sales) was 10x at the beggining of 2010 and now it's 8.5x after reaching an all-time high at 34x. That 34x multiple was real but hard to say it was ever justified, though also the current 8.5X is very very depressed ... cheap in my eyes given below January 2020 levels ... . Hard to say the businesses forming ARKK did not move a finger operationally wise since then ... .

Screen Shot 2022-01-18 at 5.45.50 PM

Howard Marks (Oaktree Capital Management) just released his latest and timely memo (fourth decades of memo writing) called Selling Out. He covers among others why people sell and the psychology behind it while below I cherry picked a part of his letter outlining how volatility is the price to pay for holding on to multi-baggers:

Screen Shot 2022-01-18 at 5.49.09 PM

Entire letter here: https://www.oaktreecapital.com/insights/memo/selling-out

All in all, expensive rates to short ARKK, some pro-transitory inflation data and a little dovish comment from the FED could easily trigger the short squeeze ... and spike the price of ARKK. For the end, some food for thought: how would it be if the retail army / WSB get together and short squeezes ARKK short sellers a' la GME & AMC ?

Screen Shot 2022-01-18 at 5.49.17 PM

Have a great Sunday !

Bogdan

P.S. previous coverage here: https://tradingfloor.cathiesark.com/posts/sunday-special-by-popular-demand-ark-invest-short-sellers