ARK Investment Management has officially launched its new interval fund: ARK Venture Fund. The SEC declared the prospectus effective on August 15, 2022. The new ARK interval fund has some unique features and will probably be as controversial as the sponsor itself. In this article we’ll take a closer look at ARK Venture Fund, and the implications it might have for the investment management industry.
About ARK Investment Management
ARK Investment Management is a firm that invests exclusively in disruptive innovation. It defines disruptive innovation as the introduction of a technologically enabled new product or service that potentially changes the way the world works. ARK’s analysts have publicly shared much of their research online, gaining a cult following among some retail investors, while also derision from professional investors. There is even an ETF that allows you to bet against ARK- the Tuttle Capital Short Innovation ETF. Cathie Wood, ARK’s founder, is well covered by the media. We recommend this profile in the Financial Times for a nuanced look at her approach to investing.
ARK has pursued its strategy through a suite of actively managed ETFs. Her flagship fund, the ARK Disruptive Innovation ETF(ARKK) earned a 38% a year return over a five year period ending in 2021. In 2020 it earned 157% However so far in 2022 ARKK’s performance has been disastrous as investors dumped high flying tech companies. According to the the Financial Times, ARKK attracted $1.5 billion of inflows in the first half of 2022, even as its value plummeted. However, in August there were major outflows. Still Cathie Wood has attracted a lot of true believers who will probably stick with ARKK, and be willing to invest in new funds that ARK Investment Management launches.
Although her disruptive innovation thesis is potentially compelling, an ETF is arguably a suboptimal structure for ARK to implement its strategy. Many of the most disruptive companies are still private. In order to access them you need a different structure. Hence the need for an interval fund.
ARK Venture Fund Strategy
ARK’s new interval fund is designed to pursue the manager’s broader disruptive innovation thesis by investing in the private as well as public companies. This is the first time Cathie Wood’s company has launched an alternative investment product.
ARK Venture fund will invest in equity across several key industry verticals including: Genomics, automation, transportation, energy, artificial intelligence, materials, infrastructure and services, and fintech.
ARK’s interval fund will have greater flexibility to make long term bets on private companies and major secular trends than an ETF, but unlike most venture capital funds, it will be available to a wide range of investors. Although most venture capital funds require several million dollars as a minimum investment, ARK Venture fund will have an investment minimum of just $1,000.
ARK’s interval fund distribution plan
ARK venture fund will have a unique approach to raising capital. ARK will offer shares through the Titan Platform and its broker dealer and investment adviser subsidiaries. The Titan Platform has a mobile app that seeks to create a transparent and convenient investor experience. The Titan Platform gives investors the ability to browse investment offerings based on location, asset type, risk and return profile. Titan’s platform also makes it possible to transact entirely online, and receive automated distributions and interest payments.
The fund will pay the distributor a 0.65% distribution/servicing fee annually. This fee will be reallowed to Titan and other intermediaries.
ARK Interval Fund Fees
ARK Venture Fund will charge a base management fee at a rate of 2.75% of average daily net assets. This is much higher than typical in the broader unlisted closed end fund space. In fact it is the highest annual management fee of any unlisted closed end fund currently in the market.
A cynic might think that ARK’s plan with the interval fund is to lock in stickier capital at high fees. This will ensure that Cathie Wood’s firm can continue to do well even if its ETFs suffer massive outflows. Furthermore, due diligence analysts will have to keep a close eye on valuation methodologies, which will impact NAV and therefore management fees. On the other hand, private equity and venture capital investing requires much more manager expertise than other strategies. Therefore, higher fees are arguably justified. If the ARK interval fund can deliver strong performance over several years , no investor will complain about the fee structure.
Implications of Cathie Wood’s interval fund
Is the ARK Venture Fund just another interval fund? Let’s speculate for a moment on the broader implications. Recent drawdowns notwithstanding, Cathie Wood’s long run track record is better than most hedge funds. It will be a challenge for ARK to raise capital in a new structure that might not be familiar to its investor base. Charging 2.75% of net assets as a management fee is also a bold move in the current market environment. The success of ARK Venture fund might be an important bellwether for firms that offer venture capital and alternative investments to retail investors.
Private equity and venture capital funds represent a small subset of the overall interval fund market, but rapid growth and innovative distribution make this a segment worth watching closely. Interval Fund Tracker recently released a report on this sector for Premium Plus Members: Private Equity and Venture Capital Interval Funds-A closer look at an emerging trend. Not yet a Premium Plus Member? Click here to join. Questions? Email Us.
See also: Interval Fund Tracker was quoted in this Citywire article on the ARK Venture Fund.