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ARKK sees return to form

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Never a dull moment for Cathie Wood, founder and CEO of ARK Invest.

In 2020 she was the ETF darling enjoying top quartile performance and returns of 39.26 per cent in with her ARK Innovation ETF (ARKK), but then became something of a pariah – and a target for short investors – as returns fell to 27.79 per cent last year.

Back to present day and the flagship ETF is back in the top performers, with ARKK set to deliver a stellar month and year to date returns sitting at 6.43 per cent.

However research from S3 Partners suggests this has not yet done enough to see off short interest in the ARK ETF family.

Overall ETF short exposure decreased from USD208 billion to USD201.3 billion, a decrease of USD6.8 billion, equivalent to losing 3.3 per cent, in the month to 10th January. 

However, total short interest in the ARK family of ETFs decreased by just USD49 million, from USD1.19 billion to USD1.14 billion. There was USD95 million of mark-to-market decreases in the value of shares shorted which was partially offset by USD47 million of new short selling. 

S3 Partners’ Managing Director of Predictive Analytics, Ihor Dusaniwsky, says: “Shorting the ARK family of funds was a profitable trading strategy in 2022. ARK shorts were up USD2.65 billion in mark-to-market profits for the year, a 127.2 per cent return on an average short interest of USD2.09 billion and [in the month to 10 January] Ark short profits outperformed the average ETF, up USD106 million in thirty-day mark-to-market profits, up 9.1 per cent on an average short interest of USD1.16 billion.”

Wood’s staple stock Tesla explains much of ARKK’s roller coaster ride, with the electric vehicle company suffering terribly in 2022 only to recover this year.

The Nasdaq 100 has rallied 11 per cent since end of December led by Tesla (up 16 per cent), META (up 21 per cent) and Coinbase – another Wood favourite – (up 53 per cent). 

Will Rhind, founder and CEO of GraniteShares, says that this recent rally explains some of the small decrease in in interest in shorting Ark.

“Given Ark’s exposure to high growth tech names, part of the decrease in short interest can be explained by the rally in tech and investors looking to derisk short positions. Another factor may be declining interest in the ‘Short Ark’ ETF as tech has staged this early 2023 rally. SARK has dropped 14 per cent since late December,” Rhind says.

Dusaniwsky says that short investors will assessing Ark will not only consider the future profitability of tech stocks, but whether Wood is a capable manager.

Dusaniwsky says: “If you are taking a view on the future of tech, you could short any innovation ETF or you could short ARK. If you think Cathie is is not as good as the general sector and that she has put too many eggs in Tesla and Coinbase then you might choose to short her.”

Given that Wood has reportedly purchased a further 475,522 shares in Tesla since the beginning of the year, her faith in Elon Musk’s vehicles shows no signs of abating, and it could well prove another interesting year for Ark Invest.

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