SoftBank phasing out derivatives option after losing market value by $17 bn

SoftBank Group Corp. 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% 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 Amazon.com Inc. and Facebook Inc., the person said.

SoftBank shareholders balked after SoftBank’s foray into derivatives trading was first disclosed in September, cutting the company’s market value by as much as $17 billion. Investors have questioned the rationale of a company known for its years-long bets on technology startups 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 investor 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 $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.

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 $2.7 billion at the end of September, or just 1.2% of the $292 billion in shareholdings. The positions include long call options on listed stocks worth $4.69 billion and short call options on listed stocks with negative $1.26 billion of value.

For all the controversy generated by the trading unit, SoftBank’s performance has been mixed. A 292 billion yen ($2.8 billion) derivative loss in the September quarter helped all but wipe out gains in the first quarter. That left a little over $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 U.S. and prospects for an effective Covid-19 vaccine reduce volatility in the markets, according to the person.

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

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.