Cathie Wood is a famous stock investor and the founder of ARK Invest, an investment management firm focusing on disruptive innovation. She became well-known for her phenomenal returns in 2020. However, Wood’s funds also suffered huge losses recently due to over-leveraging and lack of proper hedging. This article will analyze Wood’s investment strategy, stock picks, performance attribution, and risk management.
Wood believes in investing in disruptive innovation
Wood invests in companies with disruptive innovation, such as genomics, robotics, artificial intelligence, etc. She thinks these technologies can drive tremendous growth. This long-term approach has led to concentrated bets in high-growth stocks like Tesla and Zoom.
Wood’s funds use high leverage to amplify returns
ARK Invest applies high leverage of 5X or more to amplify returns. The use of swap agreements also keeps banks in the dark. While leverage can boost performance in good times, it can quickly lead to massive losses during market downturns.
Lack of proper hedging increases downside risks
Wood’s funds seem to lack effective hedging strategies. Shorting stocks is difficult in practice. Portfolio shorts like index put options can hedge market risks but may not work if the market doesn’t fall as expected.
Over-reliance on continued fund inflows
As an ETF provider, ARK relies on continued fund inflows to keep investing and collecting management fees. But significant asset outflows in a market decline can accelerate losses.
Stellar returns in 2020 but huge losses in 2022
Riding on tech stock boom, Wood’s flagship ARKK fund surged 149% in 2020. However, it has plunged over 60% in 2022 as rising rates battered growth stocks. Wood’s risk management was put into question.
In summary, Wood’s disruptive innovation thesis is compelling, but high concentration, over-leverage, inadequate hedging, and over-reliance on fund inflows have made ARK funds prone to amplified downside risks during market corrections.