The Japanese-Korean maverick investor Masayoshi Son has reportedly been buying billions of dollars in derivatives linked to U.S. tech stocks, perpetuating this summer's "melt up" in the market.
Son's Softbank Group is the "Nasdaq whale" that has shocked and worried market participants with its aggressive purchases of tech options, the Financial Times reported in its weekend edition.
Softbank shares plunged on Monday as investors in Japan got a chance to respond. Still, Son is looking at a summer gain on paper of around US$4 billion on his aggressive bets.
Softbank Group (T:9984), which has a U.S.-listed ADR under the ticker (SFTBF) , saw its stock close Tokyo trading down 7.2%, near its 8.0% low for the day. The shares are nevertheless up 23.7% so far in 2020.
The stock of the company's Japanese telecom, Softbank Corp. (T:9434), was little changed in Tokyo, with a loss of 1.1%. They're down 7.3% so far this year.
Softbank has made its purchases over the past few months, producing the largest trading volumes ever seen in contracts linked to individual tech companies, according to the FT, which cites unnamed "people familiar with the matter."
One banker described the buying as a "dangerous" bet. Softbank has spent around US$4 billion on options premiums to give it notional exposure of about US$30 billion on U.S. tech stocks. It has hedged some of that risk.
Softbank has transformed itself into one of the world's largest tech venture capitalists. It manages the US$100 billion Vision Fund, and has been attempting to raise a second even bigger fund.
This trading is distinct from the Vision investments. During the coronavirus outbreak, the company has set up an asset-management unit to place investments on public markets using capital supplied by Son.
Son has been buying call options that allow him to buy a stock in the future at a pre-set price. While the sudden move higher may be unsustainable, the activity has also concerned market participants by catching out tech skeptics and hedge funds who have been betting against tech.
"People were caught with their pants down, massively short. This can continue. The whale is still hungry," one source told the FT.
Critics would say that Softbank has changed nature from even a venture capitalist and is now acting like an aggressive hedge fund. It has hired former investment bankers who are now crafting its new strategy, with a much higher tolerance for risk.
The report did not specify which companies Softbank has been buying. But the nominal value of call options based on individual U.S. stocks has averaged US$335 billion per day over the past two weeks, Goldman Sachs says.
That's triple the normal daily average of the last two years. In a highly unusual situation, the trading of single-stock call options has exceeded the call-option volume on the broader market, which is how many large investors hedge risk.
One-third of a trillion dollars each day! The activity has gone hand in glove with frenzied buying by retail investors with Covid-19 time on their hands, and not a little desperation for extra cash in some cases.
Tesla (TSLA) shares have suddenly soared 52.2% in less than a month. From August 11 through September 2, Apple (AAPL) shot up 22.6%, Facebook (FB) was up 18.1%, Google's parent Alphabet (GOOGL) was up 16.0%, Amazon (AMZN) was up 14.6%, and Microsoft (MSFT) was up 13.9%. Those gains trimmed just slightly with two days of selling at the end of last week.