Cathie Wood’s recent travails have been a boon for some of her peers in money management.About two dozen investment advisers including Balyasny Asset Management and a unit of Blackstone Group Inc. bought bearish put options during the first quarter on the Ark Innovation exchange traded fund, her firm’s main investment vehicle, regulatory filings show.

While money managers often buy puts on ETFs to protect their portfolios against market declines, the options are typically tied to passively managed index funds such as the SPDR S&P 500 ETF Trust.

Yet technology-focused Ark Innovation grew so large so quickly -- to US$28 billion in mid-February from US$1.9 billion at the end of 2019 -- that some managers saw the actively managed fund as a better alternative to buffer against a slump in stocks that surged during the pandemic.

“The Ark Innovation fund had a tremendous run over the course of 2020 and early 2021,” Efrem Kamen, the head of New York-based Pura Vida Investments, said in an email. “However, the level of fund flows into the ETF appeared to be extreme.”

Representatives of Wood’s Ark Investment Management didn’t reply to phone and email messages seeking comment.

Ark Innovation, with the ticker symbol ARKK, returned 153 per cent last year, buoyed by investments including Tesla Inc. and Zoom Video Communications Inc. Its fortunes began to sour in mid-February, as signs of inflation spurred investors to ditch tech stocks in favor of value plays that would benefit from rising prices, such as banks and mining companies.

The ETF proved more volatile than some of the index funds that have traditionally served as a proxy for the tech sector, making it a more profitable way to bet against such stocks or hedge other holdings. ARKK tumbled 29 per cent through Wednesday from its Feb. 12 peak, while the Invesco QQQ ETF, which tracks the Nasdaq 100, fell 0.7 per cent.

“If you were sitting on some serious gains heading into this year and you want to protect those gains, it was an effective strategy,” Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, said of buying ARKK puts.

Investors pay a premium to acquire put options, which in turn entitle them to sell shares of a public company or an ETF to another investor in the future at a set price. While some managers and market-makers hold a combination of ARKK shares along with put and call options, the firms analyzed by Bloomberg held such puts exclusively or predominantly.

Deer Park Road Management Co., a Steamboat Springs, Colorado-based firm that trades asset- and mortgage-backed securities and corporate debt, bought put options during the first quarter on 2.15 million ARKK shares, according to its quarterly 13F filing with the Securities and Exchange Commission. The shares covered by the puts had a face value of almost US$258 million at the end of March.

The put options were priced too low when viewed in terms of the ETF’s past volatility, making them more attractive as a tool for hedging risk, Deer Park Chief Investment Officer Scott Burg said in a phone interview. Deer Park bought them to protect against rising interest rates, he said.

“As rates have been going up, the tech stocks have been getting crushed,” said Burg, whose firm managed about US$3.7 billion at year-end. “You could see that in the first quarter.”

Pura Vida acquired put options on 622,500 ARKK shares with a face value of almost US$75 million during the first quarter, according to its filing. The hedge fund’s portfolio had exposure to some of the same areas as the ETF, including genomics and telemedicine, according to Kamen.

“Volatility on Ark Innovation ETF was an efficient way to hedge some of the factor risk in our portfolio,” Kamen said. Factors refer to the characteristics of a stock, such as being a growth or a value play.

Blackstone Alternative Solutions disclosed that it bought put options on 1.3 million ARKK shares in the first quarter, while Balyasny acquired puts on 436,500 shares with a face value of US$52 million as of March 31. Other buyers of the puts during the period included Taconic Capital Advisors, Ikarian Capital and Davidson Kempner Capital Management.

“Sometimes hedge funds look at Tesla and Ark, and think ‘This is just way too much and I can make a killing here,’” said Eric Balchunas, an ETF analyst for Bloomberg Intelligence. “If you made a few of those trades, you’ve probably done OK in the last couple months.”