The last time we looked at SoftBank’s performance in the public capital markets following the stunning news reported here first that it was the Japanese Conglomerate that had attempted to corner the Nasdaq using derivatives to create the biggest “gamma squeeze” on record which led to a massive late-August melt up in FAAMG names (and the broader tech sector), was two months ago when according to press reports, Masa Son sprawling investment vehicle had generated some $4 billion in profits at which point it had largely unwound many of the call spread trades in question.
It turns out there was more.
SoftBank today revealed that its secretive new unit, which was launched this summer to manipulate play the market in tech stocks and which is called “SB Northstar” had racked up trading losses of $3.7bn so far, a huge swing to the $4 billion profit that had been reported previously by established financial media.
There was more: as we also first reported in “How SoftBank Made Billions Using The Biggest “Gamma Squeeze” In History”, SoftBank confirmed that Akshay Naheta, a 39-year-old former Deutsche Bank trader now based in Abu Dhabi, manages SB Northstar, which is registered in the Cayman Islands. This directly contradicts what SoftBank had said previously when they told the FT that Naheta was not formally in charge.
So what happened? Here is a brief walk down memory lane for those who missed the story:
Back in August, SoftBank first revealed that it was planning to invest about $10bn in publicly traded tech stocks as a way to diversify a portfolio that is heavily reliant on shares in Chinese ecommerce group Alibaba.
However, despite telling the press that it had every intention of curbing its exposure after it had been named as a major market participant, by the end of September, Northstar had purchased nearly $17BN of shares in US tech companies, including $6.3BNn in Amazon, $2.2bn in Facebook, $1.8bn in Zoom and $1.4bn in Alphabet.
What is notable, is that while SoftBank initially disclosed that Northstar’s capital would be just $555MM when its unveiled the existence of the asset management unit in August (of which a third would come from Masa Son), Northstar has had far more capital at its disposal, because as the FT reports, “it uses loans of cash and publicly traded securities from SoftBank’s vast balance sheet to make investments in publicly listed stocks.”
Indeed, on Wednesday, SoftBank revealed that at the end of September, Northstar managed roughly half, or $21BN of its $43BN cash pile, which has surged as the conglomerate executed a series of asset sales under pressure from activist investors such as Elliott Management.
In October, the unit also took out a margin loan of $6BN using SoftBank’s Alibaba shares as collateral.
More importantly, SoftBank also invested another $3.4bn in various equity derivatives in the form of call spreads which included long call options that were worth $4.7bn by the end of September, paired with “short call options” which SoftBank booked as $1.3bn in liabilities. Northstar also held short future contracts on stock indices, which were valued at minus $697 million.
Where things went haywire is that while the short side of the bets was supposed to merely offset the premium of the upside bets, some of the bearish positions took on outsized losses as tech shares soared during the three months to September, resulting in SoftBank booking total derivatives losses of $2.7BN.
According to the FT, the total loss for Northstar ballooned to $3.7BN for the quarter, including $900MM in unrealised valuation losses on investments made by the unit.
While it is possible that SoftBank recouped some of these losses after September, it is unlikely: citing sources, the Financial Times reports that Northstar switched to long call options after the tech rally in late summer to reduce its risk ahead of the US election, and are now going back into buying equities. Alas, that coincided with an especially turbulent period for the Nasdaq, which means that unless SoftBank timed its exit perfectly, it lost even more on theta and as implied vol fizzled while the Nasdaq drifted lower.
Separately, in its latest investor presentation, SoftBank also stated how much impact these derivatives trades could have on pre-tax profits. A 30% rise in the stocks that Northstar went long on would have boosted its long call options by $14bn, but seen its short call options lose $5.7BN. Alternatively, a 30% fall in the stock price, would have hit its long call options by $4.3BN but boosted its short call options by $1.2BN, still resulting in sizable losses.
The not insubstantial P&L exposure is at odds with Son’s previous attempts to play down the risks posed by its foray into short-term trading of highly liquid stocks, saying the investments amount to only 7% of its total equity holdings worth $292Bn. Still, as noted above, it didn’t take much to flip what was a $4BN profit in early September in the portfolio to a $2.7BN loss by the end of the month, especially considering the modest drop in the Nasdaq over that time period.
The result is that despite the much needed extra disclosure, the FT reports that analysts remain nervous, noting that Masa Son has an additional $50BN in cash burning a hole in his pocket following the disposal of SoftBank’s stakes in T-Mobile, Alibaba and its domestic telecoms arm.
“SoftBank Group’s motivations are not clear,” Jefferies analyst Atul Goyal said. “For such a long-term investor as Mr Son, we don’t understand the attraction of short-term call spreads.”
Son, meanwhile, has argued that his group cannot ignore the Big Tech if it wants to bet on the future of artificial intelligence. “The real frontrunner in the AI revolution is Gafa (Google, Apple, Facebook, and Amazon). We need to put them into our portfolio.”
And he is doing it by buying call spreads on the FAAMGs which are trading just shy of their all time highs. Could Masa’s attempt to extract a little more upside from the tech sector mark the top? We don’t know but we will remind readers that the Japanese billionaire, who was nearly ruined when the dot com bubble burst, decided to rush into bitcoin at the very top in late 2017.
As we reported in April of 2019, he ended up losing $130 million when he cashed out, a move which according to the WSJ dented “his reputation as a patient and prophetic investor.” And the WeWork fiasco wasn’t even on the horizon… Ironically, if Son had only held on, he would be on the verge of breaking even with Bitcoin trading nearly at $16K and just shy of its all time high around $20K.
Luckily for SoftBank investors there is now an adult in the room: as the WSJ reports, billionaire hedge fund investor Paul Singer is going over every Masa Son action with a microscope, which means that the possibility of even greater derivative losses is at least contained.
