Growth stocks crushed in early trading Tuesday, sending stocks from the ARK Innovation ETF (NYSE: ARKK) was down nearly 12% in a moment before the market stabilized.
However, the ARKK fund is down more than 14% from its February peak in less than two weeks, and Seabreeze Partners Management chairman and ARKK short seller Doug Kass says the worst could be yet to come.
Kass sees risk: On Tuesday, Kass said that ARK fund manager Cathie Wood has been overly aggressive in investing in overvalued and momentum-driven historic stocks.
The explosion in ARK’s assets under management, including $ 20 billion in inflows in the past three weeks, has now created an extremely risky situation, he said.
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“An ARK relaxation represents a bona fide market risk now,” Kass said.
“For the past two weeks, I have warned against the risks that ARK’s virtuous cycle, perpetuated by massive inflows, risks turning into a vicious cycle if exits begin when Cathie Wood runs her portfolio at 200 miles per hour.” .
Kass On Wood’s aggressive strategy: Wood’s strategy of buying high-momentum stocks has paid off big for investors so far.
Even after the recent liquidation, the ARKK fund is up 132% overall in the last year. However, Kass said the positive feedback loop of impulse stock buying that drives higher stock prices and more inflows of funds can easily be reversed if inflows are converted into exits.
The buying frenzy in the cryptocurrency market has inflated valuations of Bitcoin-pegged stocks, he said. In addition to a short position on ARKK, Kass has a short position on the largest share of ARKK, Tesla Inc (NASDAQ: TSLA). It is also short on other ARKK holdings exposed to Bitcoin, including MicroStrategy Incorporated (NASDAQ: MSTR), Canaan Inc – ADR (NASDAQ: CAN) and Riot Blockchain Inc (NASDAQ: RIOT).
Kass said he has witnessed the ARK Invest phenomenon many times over the years, including with Gerry Tsai’s Manhattan Fund, Tom Marsico’s Janus, Ryan Jacob’s Internet Fund, and Kevin Landis’s The Firsthand Funds.
“Names just change and it always ends badly,” he said.
Taking of Benzinga: Funds like ARKK that aggressively invest in high beta stocks tend to outperform significantly during periods of market strength and underperform significantly during periods of market weakness, such as the last two weeks.
If ARKK investors have the patience to overcome market volatility and stick with Wood for the long term, the fund will have no problem navigating market volatility. But if newcomers to ARKK lack the patience to stick with the fund, the feedback loop Kass mentioned could turn things ugly and quickly.
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