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% 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 and Facebook, 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 $17bn. 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 criticised 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.

A SoftBank spokesperson declined to comment. The company’s shares closed 0.6% lower on Wednesday in Tokyo, paring earlier losses.

SoftBank has invested about $20bn 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 programme in November as a way to put to use SoftBank’s huge 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 $2.7bn at the end of September, or just 1.2% of the $292bn in shareholdings. The positions include long call options on listed stocks worth $4.69bn and short call options on listed stocks with negative $1.26bn of value.

For all the controversy generated by the trading unit, SoftBank’s performance has been mixed. A ¥292bn ($2.8bn) derivative loss in the September quarter helped all but wipe out gains in the first quarter. That left a little over $1m in gains in the six months ended September 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 $16.2bn of “highly liquid listed stocks” in the quarter ended in September, including a $6.3bn investment in Amazon.com, $2.2bn in Facebook and $1.8bn in Zoom Video Communications Inc. In October, SB Northstar borrowed $6bn, using Alibaba shares as collateral, according to its recent financial results.

Son came up with the idea for the trading earlier in 2020 when stock markets plunged with the coronavirus pandemic. Investor pressure and opposition from key lieutenants since have helped change his mind, but shuttering the programme completely will take time because it has become a matter of face for the billionaire, one person said.


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