The tough week of Cathy Wood has reminded Wall Street that Ark Investment Management has a lot of cash in just a handful of companies. In fact, the firm’s dominance of some firms may be greater than it appears.
Ark now owns more than 10% of at least 29 companies via its exchange-traded funds, up from 24 just two weeks ago, according to data compiled by Bloomberg.
In addition, Nikko Asset Management, a Japanese company that owns a minority stake in Ark, has partnered with it to advise on several funds.
When combined, the two companies own more than 25% of at least three companies: Compugen Ltd, Organovo Holdings Inc, and Intellia Therapeutics Inc. Together, they control 20% or more of 10 additional companies.
These concentrations appear to be present as many NICO products follow the investment scheme provided by ARC; And the company that Wood founded in 2014 is investing in revolutionary elements like genomics and fintech – and that is what Nico products do, too.
Because there are so many companies that cater to these emerging topics, Wood has succeeded in attracting new money, much of it flowing into the same companies.
Arc and Niko did not respond to requests for comment on the risks of concentrating investments in some companies.
Concentration of ownership
Wood uses big-cap companies to absorb the large amount of money that her company has received, which would help reduce Ark’s influence on less liquid companies.
However, there are still concerns that concentration of ownership will be a risk for Ark and Niko and their investors. Where a decline in any of the heavily owned sectors may force them to reduce their shares, which could lead to further decline and thus more selling.
Nate Giracci, president of ETF Store, a consulting firm, said: “The most important concern may be the slippage in performance, as investors start exiting ARK funds, and this will ultimately lead to Redemptions; this could lead to more negative pressure on those securities, and create a vicious circle of these negative reactions. Indeed, this is not a problem for larger broad-based ETFs; Small capitals, there might definitely be some negative pressure on it. “
Risks of short selling bets
The companies heavily owned by ARC are showing above-average short bets, although it is impossible to determine whether this is related to concerns about ownership or just because they are risky bets.
The average short bets as a percentage of Ark Innovation’s holdings float is 4.4%, according to Bloomberg’s calculations based on data from IHS Markit Ltd. The average ranges from 3.4% for Russell 3000 companies to 2.3% for Russell 1000 companies.
Nevertheless, market options show that the bears have not fully intervened yet. Of the 29 companies, which Arc Innovation owns more than 10%, only five saw more selling than buying trades on average over the past five days. While selling activity increased widely, the average buy-to-sell ratio was 0.7%, just over half of what it was for the Russell 3000 companies.
This may be because the betting on Wood has not worked well in the past; Almost every such bet is losing money in the next six months as prices recover, Eric Balchunas, an analyst at Bloomberg Intelligence, wrote in a note this week.
“The outflows from the fund seldom last, and declines in the past have shown a tendency to attract buyers,” he added.