SoftBank winding down options trading after investor backlash

TOKYO – SoftBank Group is quietly winding down its controversial derivatives strategy after a sustained backlash from investors, according to people familiar with the matter.

The Japanese conglomerate is letting its options expire, instead of maintaining its positions, the people said, who declined to speak publicly. About 90 per cent of the contracts will close out by the end of December because they are short-term, according to one of the people. SoftBank will hold on to its underlying portfolio of big tech stocks, which included and Facebook, the person said.

SoftBank shareholders balked after SoftBank's foray into derivatives was first disclosed in September, cutting the company's market value by as much as US$17 billion (S$22.7 billion). Investors have questioned the rationale of a company known for its years-long bets on technology start-ups dabbling in public securities, especially derivatives. They have also criticized founder Masayoshi Son for taking a personal stake in the trading.

“For such a long-term as Mr. Son, we don't understand the attraction of short-term call-spreads,” Atul Goyal, senior analyst at Jefferies, wrote in a report in November.

SoftBank wasn't immediately available for comment.

SoftBank has invested about US$20 billion into tech stocks and derivatives through SB Northstar, in which its billionaire founder personally holds a one-third stake. Analysts and fund managers have questioned the structure of the unit, most recently on a late-evening call after an earnings announcement in November.

Mr Son defended the investment program in November as a way to put to use SoftBank's massive cash pile and has said the derivative bets are “a rounding error” relative to the company's assets. The fair value of SoftBank's futures and options positions came to US$2.7 billion at the end of September, or just 1.2 per cent of the US$292 billion in shareholdings. The positions include long call options on listed stocks worth US$4.69 billion and short call options on listed stocks with negative US$1.26 billion of value.

For all the controversy generated by the trading unit, SoftBank's performance has been mixed. A 292 billion yen (S$3.7 billion) derivative loss in the September quarter helped all but wipe out gains in the first quarter. That left a little over US$1 million in gains in the six months ended Sept 30, a surprising result given the rally in most tech stocks.

Earnings in the business are improving this quarter, one of the people said. But turning a profit on the derivatives has become increasingly difficult as the conclusion of tumultuous presidential elections in the US and prospects for an effective Covid-19 vaccine reduce volatility in the markets, according to the person.

SoftBank acquired about US$16.2 billion of “highly liquid listed stocks” in the quarter ended in September, including a US$6.3 billion investment in, US$2.2 billion in Facebook and US$1.8 billion in Zoom Video Communications Inc. In October, SB Northstar borrowed US$6 billion, using Alibaba shares as collateral, according to its recent financial results.

Mr Son came up with the idea for the trading earlier this year when stock markets plunged with the coronavirus pandemic. Investor pressure and opposition from key lieutenants since have helped change his mind, but shuttering the program completely will take time because it has become a matter of face for the billionaire, one person said.

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