SoftBank has lifted the lid for the first time on “SB Northstar”, the new unit set up to play the market in tech stocks, and revealed that it has racked up trading losses of $3.7bn so far.

Until now, SoftBank has shrouded the unit in secrecy, declining to say who was in charge of the unit or what its decision-making process was, after the FT revealed that it was the so-called “Nasdaq whale” buying billions of dollars of derivatives on US tech stocks over the summer.

On Wednesday, however, SoftBank said 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. SoftBank executives previously told the FT that Mr Naheta was not formally in charge.

Abu Dhabi company records show that Mr Naheta and his former Deutsche Bank colleague Rajeev Misra, the head of SoftBank’s $100bn Vision Fund, became directors of this fund management unit in July but that Mr Misra stepped down in early September.

Mr Naheta has a reputation for complex derivatives trades, last year masterminding SoftBank’s controversial bet on the shares of Wirecard, the now collapsed payments company. SB Northstar’s trades are cleared by a three-member investment committee composed of Masayoshi Son, Mr Naheta and Ron Fisher, SoftBank’s vice-chairman. 

While Mr Naheta manages Northstar, people close to the trades said Mr Son was the driving force behind the US tech investments. The SoftBank founder has also told investors that he was deeply involved in running the trades.

How big are Northstar’s trades? 

SoftBank said in August 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. 

READ ALSO  Netanyahu took secret flight to Saudi Arabia to meet crown prince

But by the end of September, Northstar had purchased nearly $17bn of shares in US tech companies, including $6.3bn in Amazon, $2.2bn in Facebook, $1.8bn in Zoom and $1.4bn in Alphabet. 

It invested another $3.4bn in equity derivatives. The trades included “long call options” — bets on rising stock prices that provide the right to buy stocks at a preset price on future dates — that were worth $4.7bn by the end of September.

It also bought “short call options”, that assume falling stock prices, that SoftBank booked as $1.3bn in liabilities. Northstar also held short future contracts on stock indices, which were valued at minus $697m.

Some of the bearish positions it took were hit as US tech shares rose during the three months to September, resulting in SoftBank booking derivatives losses totalling $2.7bn. The total loss for Northstar reached $3.7bn for the quarter, including $900m in unrealised valuation losses on investments made by the unit. 

Line chart of Indices rebased showing tech stocks have surged during the pandemic

Market participants who have followed SoftBank’s big US tech trades closely believe the group 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.

In its investor presentation, SoftBank also stated how much impact these derivatives trades could have on pre-tax profits. A 30 per cent rise in the stocks that Northstar bet on would have boosted its long call options by $14bn, but seen its short call options lose $5.7bn. A 30 per cent fall in the stock price, meanwhile, would have hit its long call options by $4.3bn but boosted its short call options by $1.2bn.

READ ALSO  US air travel rises despite Thanksgiving pandemic warnings

How much firepower does Northstar have?

When SoftBank announced the existence of the asset management unit in August, it stated that its initial capital would be $555m, with a third of this coming from funds contributed by Mr Son himself.

But Northstar has far larger firepower at its disposal, because it uses loans of cash and publicly traded securities from SoftBank’s vast balance sheet to make investments in publicly listed stocks. 

SoftBank revealed on Wednesday that, at the end of September, Northstar managed $21bn of its $43bn cash pile, which has swelled as the group has executed a series of asset sales under pressure from activist investors such as Elliott Management.

Last month, the unit also took out a margin loan of $6bn using SoftBank’s shares in Alibaba. 

Column chart of cash and cash equivalents + short-term investments (Ytn) showing Northstar uses funds from SoftBank's huge cash holdings

What other trades is Northstar carrying out?

While SoftBank’s $100bn Vision Fund was set up to make equity investments in private technology companies, the new Northstar unit makes trades in publicly listed companies. It has the ability to take both long and short positions, in a similar manner to a hedge fund.

SoftBank this week described the new unit’s primary business as to “frequently trade marketable securities”.

Northstar has a $4.1bn short position on credit markets, although it is unclear if this is an outright bet against corporate debt markets or a hedge against one of its other positions.

It also invests in new equity issued by public companies. Norwegian educational software company Kahoot! announced last month that it had raised $215m-equivalent by selling new shares to SoftBank, which a person familiar with the transaction said had been carried out by Northstar.

READ ALSO  Dollar Jumps, Gold Dumps, As Massive Short-Squeeze Sends 'Greed' Near 2020 Highs

Mr Naheta has a history of carrying out arbitrage transactions in the shares of companies. Before joining SoftBank in 2017, the Indian trader managed a small London hedge fund, whose profitable trades included a bet that the prices of two classes of shares at India’s Tata Motors would converge.

How risky are these trades? 

SoftBank executives, particularly Mr Son, have played down the risks posed by its foray into short-term trading of highly liquid stocks, saying the investments amount to only 7 per cent of its total equity holdings worth $292bn. 

The gains and losses from the options trades fluctuate all the time. In early September, SoftBank was sitting on gains of about $4bn. That turned to a $2.7bn loss as of end September but the losses may have reversed by now. 

But analysts remain nervous, noting that Mr Son has $50bn in cash 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.”

Mr Son 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.”

Via Financial Times