It's Getting More Expensive to Bet Against Cathie Wood

(Bloomberg) — Short sellers are homing in on Cathie Wood’s pool of exchange-traded funds, undeterred by the rising cost to bet against the Ark Investment Management family.

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Investors who expect her group of funds to decline have sent short interest to 16.8% of all freely available shares, up from about 13% in mid-August, according to data compiled by Ihor Dusaniwsky at S3 Partners. It’s a bet that the Federal Reserve’s aggressive tightening will continue to hammer Wood’s rate-sensitive picks. Her flagship fund has plunged around 60% so far this year.

Even though total short interest for the funds declined to $1.86 billion this week from $1.92 billion in mid-August, there was about $405 million of new short selling that nearly offset the $463 million of mark-to-market declines in the value of shares shorted. That means that as the price of the shorted shares declined, there was additional short selling in order to make up for that decline. “Short sellers were looking to back up their bets in a winning trade,” Dusaniwsky said.

“Short sellers were actively backing up their bets as stock price of the underlying ARK ETF holdings declined,” he said, pointing out that the average stock-borrow cost to short the ETFs increased to 4.92% from 2.6% in mid-August.

The surge in short selling marks a departure from earlier this year, when the value of short bets declined. After a stellar 2021, Wood’s funds are struggling to withstand shifting trader sentiment as the Fed’s fight against inflation threatens the type of growth stocks featured in Ark funds.

Both the flagship ARK Innovation ETF (ticker ARKK) and ARK Fintech Innovation ETF (ARKF) have lost roughly 60% this year, while the ARK Genomic Revolution ETF (ARKG) has shed about 45%. S3 counted eight different funds in its calculations.

“It’s no different than other funds: As the market continues to sell off, people are looking to short those funds now because they think they will possibly slide the most,” said Mohit Bajaj, director of ETFs at WallachBeth Capital. “The higher-beta names tend to fall the hardest during market downturns.”