Potential Liquidity Issues at ARK Invest

ARK ETFs have been performing extremely well in the past year or two, largely for the high tech/innovation stocks. Its funder and CEO, Cathie Wood, has become the WallStreet darling or even called the stock goddess.  There are lots of FOMOs chasing ART funds but the past couple of weeks of hard selloff has raised some questions about its longevity due to a potential concern about its liquidity. I thought to share with you so that you won't be caught off guard if you happen to be one of those FOMOs. 

Edwin Dorsey of The Bear Cave wrote this: Potential Liquidity Issues at ARK Invest. Excerpt:

On February 16, The Bear Cave highlighted potential liquidity issues at ARK Invest, the hot active ETF firm founded by Cathie Wood that has seen assets grow from around $10 billion to $60 billion over the last 12 months. On February 23, The Bear Cave reiterated liquidity concerns about ARK Invest. Later that day, Cathie Wood said,

We love a wall of worry. We saw it on social media, lot of chatter, some of it just waiting for our fund in particular to take a tumble, maybe to buy and some happy to sell and short and all that.

ARK's flagship Innovation ETF is now down 20% from its highs and is beginning to face outflows. The illiquidity risks are serious and worsening.

ARK's illiquid holdings are problematic because as ARK faces redemptions, hedge funds could take predatory short positions in ARK's illiquid holdings and create a performance death spiral. A review of ARK's illiquid holdings shows that could be happening...

What makes ARK's situation potentially worse is the heavy retail participation in many of its names. Retail investors may be fickler and have price-drive sentiment. As a result, any declines in ARK's illiquid names may drive copycat selling by retail traders playing with momentum.

In addition, Bloomberg recently reported that Nikko Asset Management, a Japanese firm, copies many of ARKs strategies for Japanese investors. This makes ARK's illiquidity even bigger than it seems. For example, when accounting for the shares owned by Nikko, ARK and Nikko own "at least 25% of three firms" according to Bloomberg...

Short-sellers appear to smell trouble brewing. According to one trader, the borrow rate on ARK's Innovation ETF (ARKK) reached 19% yesterday.

Reddit traders are raising alarms too. One post titled, "Investors beware: $ARKK is a liquidity disaster waiting to happen" was upvoted over three thousand times.