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Cathie Wood's New Fund Targets Illiquid Assets, Limits Exits

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Cathie Wood is upping her big bet on disruptive tech companies via a new fund targeting less-liquid markets with limits on how quickly investors can exit.

Wood’s firm ARK Investment Management — whose lineup of exchange-traded funds is reeling in the U.S. rout in growth stocks — filed on Thursday for a closed-ended “interval” fund that would expand her flagship strategy into harder-to-trade assets.

The ARK Venture Fund will follow the same “disruptive innovation” investment theme as the famous ARK Innovation ETF (ticker ARKK), but target “illiquid securities and securities in which no secondary market is readily available, including those of private companies,” the filing said.

The fund is structured with lock-up provisions that will help the famous Wall Street manager to keep more control over investor cash moving in and out of the strategy.

It’s a telling move by the star money manager. Despite a woeful run of performance that has seen ARKK tumble more than 50% from its peak, investors have stayed remarkably loyal.

The new fund will be able to tap into this fan base and invest in companies earlier in their market cycle. It also sidesteps worries about concentration, liquidity and scale that dogged its ETFs after they lured billions.

“This makes a lot of sense as the structure will give Cathie and Co. the freedom to really explore the less liquid areas of the market without having to worry about capacity issues like they would in an ETF,” said Eric Balchunas, a senior ETF analyst with Bloomberg Intelligence. “It’s also smart because it is serving up something Vanguard doesn’t and so can be used to complement the increasingly passive core of a portfolio.”

A spokesperson for ARK confirmed that the filing had been made, but declined to comment further while the fund undergoes the review process at the U.S. Securities and Exchange Commission.

Interval funds are one solution to a developing dilemma for asset managers. In an era when bonds are less effective at diversifying portfolios and returns are expected to be weak across major assets, investors are increasingly interested in alternatives like real estate or private credit.

Using an ETF or open-ended mutual fund — which trade daily — to access such assets creates a liquidity mismatch when managers need to raise cash for any redemptions.

By offering redemptions of between 5% and 25% of the fund’s shares just once a quarter, the ARK Venture product should make any mismatch easier to manage. The firm expects to offer 5% per quarter, according to the filing. If the demand to exit exceeds the repurchase offer, shareholders may only be able to withdraw a portion of their investment.

Although Wood’s ETFs are mainly focused on listed equities, liquidity concerns have dogged ARK because the company often invests in niche corners of the market.

When the firm exploded in popularity after its stellar run in 2020, the amount of cash funneling into those stocks ballooned. At one point, ARKK held stakes of 10% or more in about 30 names, including more than 25% in Compugen Ltd., Organovo Holdings Inc. and Intellia Therapeutics Inc.

The shift to make it harder to pull cash out also mimics a trend in the hedge fund industry, where firms are asking clients to lock up cash for longer.

Late last year, Izzy Englander’s Millennium Management was raising cash for a new share class that extended the redemption period to five years. Brevan Howard Asset Management has asked some investors to commit to two.

Meanwhile, Wood has previously noted that innovative companies are valued more highly in the private markets than the public sphere. Tweeting a news story in January about a company choosing to raise funds privately, she said the disconnect “is as wide as I ever have seen.”

Private markets are typically considered more risky than public, thanks to lower disclosure and regulatory requirements, though potential gains can be larger.

The Venture Fund will carry a minimum investment of $1,000, according to the filing, providing a low bar for retail investor participation. The product can also leverage to help boost returns.

The $11.5 billion ARKK dropped 27% this year through Thursday. The latest data show net outflows of about $265 million in 2022.

(Photo: Kyle Grillot/Bloomberg)

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