Hedge fund manager says Ark ETF stocks are a potential 'time bomb'

Published Sun, Jan 16 202211:31 PM ESTUpdated Mon, Jan 17 202212:12 AM EST

Key Points

David Neuhauser's hedge fund Livermore Partners was short Cathie Wood's Ark Innovation ETF in 2021.
He now says ARKK will become a "poster boy for all the things in the current cycle that you should not have been investing in."
ARKK is down 11% year-to-date, according to Refintiv data.

Hedge fund manager David Neuhauser, who shorted Cathie Wood's flagship fund last year , says Ark Innovation will become a "poster boy for all the things in the current cycle that you should not have been investing in." Neuhauser, founder and CIO of Chicago-based Livermore Partners, said during CNBC's latest Pro Talks that the "valuations assigned to many of her companies are still extremely frothy and potentially could be a time bomb when those sectors see some level of a downturn." The comments come after a difficult end to 2021 for ARKK following a stellar performance sparked by the coronavirus pandemic. The fund is down over 12% year-to-date in 2022, and off around 45% from its Feb. 2021 all-time high. Streaming device company Roku , along with telemedicine and virtual health care company Teladoc Health and Zoom Video are among the companies held in ARKK, all of which have fallen year-to-date. Neuhauser said he had covered, or closed, Livermore Partners' short position in ARKK after it fell 20% to "lock in gains," but doesn't rule out shorting the ETF again in the future. On Jan. 7, Wood said that the market looks "irrational" as technology companies sold off, but added that it will stabilize soon amid the new earnings season. "As we see these earnings reports coming in, and the guidance for the first quarter and this 'fessing up out there into what's really going on with inventories, that we're going to see the turn sooner rather than later," Wood said in the video posted on Ark Invest's website. Neuhauser, however, is not convinced and said Wood had it wrong when she called stock markets irrational. 'Perfect storm' The Covid pandemic had been a "perfect storm" for Wood's style of investing, Neuhauser said, alluding to how central banks have supported economies with loose monetary policy. This has buoyed so-called "growth stocks" in particular, because looser policy has made it cheaper for these companies to hold and service debt. Now, the U.S. Federal Reserve has said tighter monetary policy will be needed to control inflation. In his confirmation hearing before the U.S. Senate on Tuesday, Fed Chairman Jerome Powell said he expected interest rate hikes this year. In contrast to most on Wall Street, however, Woods expects deflation to be an issue this year, after a fall in commodity prices. "And I think completely the opposite to her, as far as where inflation is," Neuhauser stated. The U.S. consumer price index , one gauge of inflation, rose 7% in December from a year earlier, according to the data released by the Labor Department on Wednesday. This represented the fastest increase in consumer prices over a 12-month period since 1982. "Some [of ARKK's holdings] are very strong companies, things like Paypal , Square and Tesla , things that, you know, have grown tremendously," Neuhauser said. "But the sustainability path and valuations have always been a concern because its been fed on this low rate environment." He added: "I think now we're going to see sort of 180 [degree turn] over the next few years, and I think her shares are going to suffer." Woods, however, insists the "disruptive innovation" stocks in her fund will outperform, urging investors to stick with her. "Just keep your eye on the prize. Truth will win out," she said in December. CNBC contacted Ark Invest for comment but had not received a response at the time of publishing.

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