Cathie Wood, founder and CEO of ARK Invest
Patrick T. Fallon/AFP/Getty Images
Cathie Wood, known for her investments in disruptive companies, is branching out into private equity for retail investors.
The founder and CEO of innovation-focused investment firm ARK Invest is launching a closed-end fund that will hold onto investors’ cash for longer so as to maximize returns in volatile investments—a move that comes as her existing exchange-traded funds continue to slide. ARK filed documentation for the fund with the Securities and Exchange Commission on Thursday.
The ARK Venture Fund will invest in disruptive, innovative companies that are expected to grow exponentially like most of those held by the ARK ETFs. It is different in that it requires investors to be much more committed with their cash.
Unlike ETFs and open-end mutual funds, closed-end funds can’t create or redeem shares per investors’ demand. Some closed-end funds are listed on a stock exchange, giving investors at least the chance to trade with one another. But ARK says it currently doesn’t have plans to list its new Venture fund for public trading.
To offer investors a way to cash out, the fund will repurchase 5% of its outstanding shares each quarter, according to the filing. Such funds are called “interval funds” because of the time between the redemption windows. A key factor for investors is that since the amount of shares to be repurchased is limited, more stock might be offered for sale than the fund will buy. That means investors may not be able to sell as much as they hope at any window.
Preventing investors from selling their shares whenever they like reduces pressure on the fund to keep lots of cash available, and to sell its investments when prices are low. The fund is designed primarily for long-term investors and not as a trading vehicle, according to the filing.
The stricter control over cash flow will also allow the ARK Venture Fund to invest in illiquid securities, such as those of private companies, which is challenging for ETFs given their constant redemption needs. The product may also use leverage to help boost returns, according to the filing.
ARK’s existing ETFs have had a hard time since their prices peaked a year ago.The Covid-19 pandemic accelerated the adoption of many emerging technologies in 2020, so ARK ETFs, dominated by innovation stocks, surged. They were some of the top-performing funds that year.
Things took a turn for the worse in 2021 as rising inflation, and expectations that the Federal Reserve will increase interest rates in response, raised yields on long-term Treasury debt. Higher yields are bad news for growth stocks such as those Wood buys because they reduce the current, discounted value of earnings that will flow in years in the future. Those future earnings are why investors are often willing to pay top dollar for growth stocks.
The flagship ARK Innovation ETF (ARKK), which soared 157% in 2020, lost 25% in 2021. The fund is down an additional 23% year to date.
With market momentum shifting and publicly traded innovation stocks struggling, it isn’t surprising that Wood is looking at the private market and companies in earlier stages of development for potentially better returns. “It’s hard not to be struck by the timing if this filing, given the performance of the ETFs,” says Ben Johnson, director of global ETF research for Morningstar.
ARK confirmed its filing for the Venture Fund, but declined to discuss it further, saying the fund is still undergoing the SEC review process.
Wood has noted in the past that innovation companies are often given much higher valuations in the private market than in the public market, since stock investors are more wary of risks and volatility. That’s where she saw value gaps and investment opportunities, she told Barron’s in an interview last year.
Private equity is often geared toward institutional investors or accredited high-net-worth individuals that can tolerate higher risks. The ARK Venture Fund, however, will have a minimum investment of just $1,000, according to the filing, making it accessible for most retail investors.
Investors need to be careful though. Private companies are usually considered more risky, since there are less regulatory requirements for financial disclosure. Shareholders might also suffer bigger losses in times of volatility since they can’t back out whenever they want.
The ARK Venture Fund expects to make its initial repurchase offer two quarters after it is launched. The redemptions will be paid out at net asset value, according to the filing. Exchange-listed closed-end funds, on the other hand, often trade at a premium or discount to the value of their underlying assets, due to imbalances in the supply and demand for their shares.
Besides the Venture fund, Wood has also been exploring other products and strategies. She said last November that ARK was testing an internal portfolio that bets against the corporate victims of innovation through short positions. In December, the firm launched the ARK Transparency ETF (CTRU), which selects stocks based on the transparency in corporate behavior and their impact on human well-being and environment.
Write to Evie Liu at [email protected]
