ARK Invest's Cathie Wood.
Courtesy PhotographStar stock picker Cathie Wood defended her investment thesis in a series of tweets on Tuesday, calling out “Big Short” hedge-fund manager Michael Burry for betting against her flagship ARK Innovation exchange-traded fund.
“To his credit, Michael Burry made a great call based on fundamentals and recognized the calamity brewing in the housing/mortgage market,” Wood tweeted, referring to Burry’s prediction of the subprime mortgage crisis, which made him and his investors hundreds of millions of dollars.
She went on: ” I do not believe that he understands the fundamentals that are creating explosive growth and investment opportunities in the innovation space.”
Burry, whose life was told in the Oscar-winning biopic “The Big Short,” disclosed in a Monday filing that his firm, Scion Asset Management, held bearish put options against 235,500 shares of Woods’ actively managed ARK Innovation ETF (ticker: ARKK) at the end of the second quarter. The new position was valued at almost $31 million, according to the quarterly filing, which is required for hedge funds above a certain size.
A put contract gives Scion the right to sell shares in the ETF at a previously agreed price before a certain date. If ARK Innovation’s shares drop below the threshold before the options expire, the hedge fund can sell the shares for a profit.
Burry isn’t the only investor betting that the price of ARK innovation will fall. The volume of put options traded on ETF is rising, while the short interest on the ETF recently reached a record high. There is even a Short ARKK ETF in the filing that, if approved by the Securities and Exchange Commission, would allow retail investors—those who can’t sell shorts or trade options directly—to make bearish bets against Woods.
Wood’s company, ARK Invest, took in billions of new assets last year from spectacular performances by some of her active ETFs focused on high-growth innovation-driven stocks. Several were among 2020’s best-performing funds, with returns of more than 100%.
But the funds have struggled to maintain that momentum this year. Many of their stockholdings are trading at lofty valuations that are betting on huge expected growth in the future. As inflation flares up and interest rates rise, however, the current value of the growth companies’ future cash flow is being diminished. The ARK Innovation ETF is now 6% down for the year, with $500 million asset outflows in the past month.
In her tweets, Wood made bullish case for innovation stocks: “Unlike the tech and telecom bubble, this equity bull market has broadened beyond the innovation strategies that boomed last year to value and other stocks that had trailed. The bull market has strengthened, setting the stage we believe for another leg up in innovation strategies.”
Wood isn’t worried much about inflation. Disruptive innovation and creative destruction brought by technological development is already causing a deflation in commodity prices, she explained, and the equity market is more than likely to reward disruptive innovation strategies again once headline inflation breaks and/or recession fears increase—probably in the next three to six months.
Burry has been cautioning about the unsustainable valuations of some ARK holdings for months. He already holds big bearish positions against electric car maker Tesla (TSLA), one of the top investments in ARK ETFs. Monday’s filing shows that Burry increased his bearish puts on Tesla to nearly 1.1 million shares, up from 800,100 shares in the first quarter. Those bets are worth $731 million.
Tesla shares declined 3.7% on Tuesday, while ARK Innovation dropped 1.7%. Both are in the negative territory year to date, but still trading at much higher levels compared to the start of 2020, up by 689% and 129%, respectively.
Burry not only predicted the collapse of the real estate market, but years earlier he foretold the crash of tech stocks.
The financier was also one of the first big-name investors to bet on GameStop in 2020, which led to a buying frenzy in the videogame retailer’s stock earlier this year. But Burry sold his entire stake before GameStop became a meme stock on Reddit, missing out on the 2,000% surge.
Burry also has warned about the hype in cryptocurrencies, predicting the market will be “the mother of all crashes.”
“When crypto falls from trillions, or meme stocks fall from tens of billions, #MainStreet losses will approach the size of countries. History ain’t changed,” he wrote in a tweet in June, which was later deleted.
Write to Evie Liu at evie.liu@barrons.com
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Cathie Wood: 'Big Short' Michael Burry Doesn't Get Innovation Strategies - Barron's
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