The Tesla-Bitcoin-Ark syndrome revisited

On a more positive note for the actual driver of Tesla, the 10-K filing announcing the Bitcoin holding, the company also announced FY20 revenue breakdown on geographies showing that for the first time ever, more than 50% of revenue came from outside the US.

Ark Invest is building a tower of risk

Before the news broke on Tesla and Bitcoin, we were planning a research note on Ark Invest holdings across their five actively managed ETFs. Our motivation was driven by the fact that Ark Invest recently pushed above $50bn in asset under management (AUM) and that some holdings in the Ark Disruptive Innovation ETF were getting quite concentrated. As a result, we have dived into the numbers and can now extend our note It is time to get cautious on the Tesla-Bitcoin-Ark connection back in January.

There are two main idiosyncratic risk sources around the Ark funds if we exclude the general market risk. The first one, is the percent ownership of outstanding shares in a specific company across holdings in its five actively managed ETFs. The list below shows the company where Ark Invest owns more than 10% of the outstanding. The sharp observer will quickly note a big overlap with the new generation of biotechnology companies, that we also recently wrote about, and given Ark Invest has grown AUM from around $3bn a year ago to over $50bn gives you an indication of how big a force the investment firm has been in the bull market in biotechnology stocks. But AUM flow can reverse and thus these concentrated positions can become a liquidity issue and big risk for these stocks and Ark Invest itself.

Source: Saxo Group, and Ark Invest

The second risk source is from individual holdings of stocks in percentage of their AUM. The list below shows that Tesla shares across their funds are 6.7% of total AUM in those five funds. The three other large positions are Teladoc Health, Roku, and Square. What it means is, that a correction in equities for whatever reasons, could be higher interest rates or prolonged Covid-19 lockdowns, could set in motion sell-offs across either biotechnology stocks or Tesla shares and cause performance to deteriorate which could start net outflow of AUM and then the feedback loop has started. Our hypothesis is that there is a high degree of overlap between investors and speculators in Tesla shares, Bitcoin, and other cryptocurrencies, and then Ark Invest funds or related stocks such as the biotechnology stocks. This risk concentration is important to understand if you have positions in your portfolio that is part of this “network structure” of positions.

Source: Saxo Group, and Ark Invest