1/ In addition to the speculation surrounding ARK’s concentrated positions, there also has been much discussion on Twitter of her recent trend toward buying her own funds. You’ll be happy to know the SEC has this covered under Section 12 of the Investment Company Act.
2/ Before getting into Sec 12, many funds routinely purchase shares of other registered investment companies. And for clarity’s sake, a registered investment company is an open-end mutual fund, a closed-end, or an ETF.
3/ Ol’ Cath states in her SAI that she is allowed to buy other RIC’s as a matter of policy as you can see here. This language is in many other fund family SAI’s (mine included). This is also the activity that is TIGHTLY governed by Section 12.
4/ Section 12(d)(1)(A) of the Act places the following limits on any RIC

(1) buying more than 3% of another RIC (the “3% Limit”);
(2) investing more than 5% of its assets in a single RIC (the “5% Limit”);
(3) investing more than 10% of its assets in RIC's (the “10% Limit”)
5/ In short, a RIC can’t own 3% of the outstanding shares of another, it can’t allocate more than 5% of IT’S assets to one RIC, and it can’t have more than 10% of its portfolio in RIC’s unless. . . the other RIC is affiliated – i.e., run by the same management company.
6/ Section 12(d)(1)(G) of the 1940 Act permits mutual funds and unit investment trusts (“UITs”) to acquire unlimited shares in other mutual funds or UITs in the same fund complex. There are two aspects of this rule worth exploring here: fee layering and redemptions.
7/ Generally speaking, if you invest in your own funds, you should (not mandatory) back out the portion of fees earned from your stake in the purchased fund. Your Fund A buys 1.0mm in your Fund B, your fee calc in Fund A needs to back out the AUM in Fund B.
8/ This calculation is done by the Trust admin, in Cathie’s case, BONY. There is also a qualitative element: to justify the purchase, 12(d)(1) requires the acquiring fund’s adviser to determine that it is in the best interest of the acquiring fund to invest in the acquired fund.
9/ So, a good faith effort needs to be made to determine the exposure gained is more efficient and better for shareholders by using the acquired fund INSTEAD of the individual stocks that make it up.
10/Usually this works when a fund buys a long/short fund for hedging purchases, or an EM fund because you can’t settle locally or don’t want to buy ADR’s or something. That’s an easy justification.
11/ I can’t for the life of me figure out the justification for ARKK buying PRNT or ARKX or whateverthefrig she does, instead of just the underlying stocks. It’s certainly more expensive for shareholders but better for ARK’s AUM management. Ultimately it is a board decision.
12/ The more interesting angle is with respect to. . . redemptions. To address concerns that an acquiring fund could threaten large-scale redemptions as a means of exercising undue influence over an acquired fund. . .
13/ 12(d)(1) prohibits a fund that acquires more than 3% of an acquired fund’s outstanding shares from redeeming more than 3% of an acquired fund’s total outstanding shares in any 30-day period.
14/ Here’s where it gets really fun: an affiliated fund is ALSO restricted in its ability to redeem affiliated funds. Prior to 2019, affiliated fund of funds could freely redeem significant amounts of affiliated underlying funds.
15/ This also means the acquiring fund would need to treat its now redemption-restricted investment as illiquid. Remember yesterday’s discussion on liquidity?
16/ There are a whole host of other issues in play here far too complicated for this thread. Suffice it to say in my prior life I had a front row seat for 12(d)(1) issues and learned some expensive and painful lessons in the process (another thread someday).
17/ So many people that cover Investment Companies know so little about the plumbing. Beware of idiot Bloomberg writers who should know better but don't. It amazes me how clueless people are that are supposed to be knowledgeable about the space they cover.
What she’s doing is allowed. With limits. I can’t find a purchase rationale for the affiliated funds, but then I don’t pray with Billy Hwang either. She probably isn’t double-dipping but either way, this is on the board to permit and monitor.

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More from @cppinvest

7 Apr
1/ Alot has been written about illiquid, concentrated positions in ETF’s and the risk that poses to investors. A lot more will be written. You may be shocked to know that the SEC looked hard at liquidity provisions in RIC’s and actually imposed a new liquidity rule in 2019.
2/ The Rule, 22e-4, is commonly referred to as N-PORT. Complying with the rule was easy, but its costs were enormous ($86,000 annually to my funds in 2019). One of the rules mandated funds establish Highly Liquid Invest Minimums in any portfolio.
3/ Guess who was exempt from compliance with the HLIM provisions? In-kind ETF’s and ETF’s that publish daily holdings.
Read 20 tweets
11 Mar
1/ Don't mean to speak for our boy, but I believe @Keubiko is saying is that ARK really isn't a serious money management shop. Perhaps even that ARK is deliberately playing to retail for obvious reasons (Narrator: No institution would take anyone that owns $WKHS seriously.
2/ You remember the breathless reporting from Bloomberg and others that discussed ARK's astronomical asset growth relative to the other big industry players, the real shops, and you might have rightly wondered, "where is the growth coming from?"
3/ I can tell you where it's not coming from - US-based institutions. Hmmm.

Here's a chart of institutional ownership in popular ETF's. The mainline products are widely owned by US institutions - defined as mostly RIA's and broker/dealer platforms.

h/t @TESLAcharts
Read 7 tweets
2 Feb
1/ With markets riveted by the action in $GME, attention has been turned to evil short sellers, which is natural. The action in $GME is made more compelling by the breathless reporting in the media that it was so heavily shorted, with more than 100% of its float short. Ooohhh.
2/ You know why investors get involved in heavily shorted names, and keep shorting them?

Because it works.

From March '08 through March '20, the most expensive to borrow US equities underperformed the least expensive to borrow shares by an average of 1.3% per month.
3/ Except for now. January 21 was the worst month in history for the most-heavily-shorted stock factor. And it hasn’t just been January. The rolling 12m average spread between high and low fee shares turned positive recently for and has remained there since.
Read 25 tweets
31 Jan
The con runs deep. Amazing how stupid and gullible people can be.

$TSLA Image
Read 5 tweets
18 Dec 20
Covid isolation is negatively impacting the elderly.

Been visiting my 85 y.o. father-in-law this week. A month ago he fell and broke his hip, had surgery the week before Thanksgiving. Was ornery post-surgery and making slow progress on recovery. His only contact has been with
my mother-in-law and the in-home nurse/aide. He's been sleeping in a hospital bed downstairs in what used to be the living room. He was spending too much time in the bed and in his wheelchair and grouchy. He wants to be in FL and is mad that he isn't. He's mad that he fell.
All perfectly normal and understandable. We show up two days ago, one week after he got home from the hospital. At first he was listless and uncomfortable we were there. We moved the furniture around that was piled up to make room for the bed and other medical equipment.
Read 8 tweets
14 Nov 20
1/ For you youngsters that are unfamiliar with the inner workings of our business, let me translate this. All public registered vehicles are required to have a distributor by statute. Your distributor handles your broker dealer relationships (managing the various platform
2/ requirements and regulatory compliance), and they oversee your factsheets and public communications (as does internal compliance). For that, most statutory distributor relations cost between 5-10 basis points per year. Kelso/Resolute was Ark's distributor.
3/ In addition, many firms also hire distributors or third-party marketing firms to push their products through the broker dealer channel. It used to require a pretty heavy monthly retainer plus a portion of the management fee as compensation. Howevah. . .
Read 13 tweets

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