How Softbank went from a tech investor to a big hedge fund

Softbank, the Japanese technology investor, appears to be gambling rather than investing these days. Shareholders are rattled. Matthew Partridge reports.

Masayoshi Son © Akio Kon/Bloomberg via Getty Images
Masayoshi Son lost $70bn in the dotcom crash
(Image credit: Masayoshi Son © Akio Kon/Bloomberg via Getty Images)

The Japanese conglomerate SoftBank, run by Masayoshi Son, is among the world’s “biggest and most controversial” technology firms, say Matthew Field and Hasan Chowdhury in The Daily Telegraph. While it is known to focus on “young, privately-held companies”, SoftBank is now revealed to have made large bets on publicly-traded tech companies too.

It purchased $4bn of call options on tech firms. These instruments, which allow it to buy a stock at a certain price, turned the firm into a “whale”: an investor so large they automatically drive the market up if they make a purchase.

SoftBank may claim to have made $4bn in paper profits from its unusual strategy, but it is unclear whether any money will remain once the dust clears, says Jennifer Hughes on Breakingviews. Already, a “sharp downturn” in US tech stocks at the end of last week has wiped more than 10% off the Nasdaq Composite index (see page 4).

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

At the same time, SoftBank’s own shares tumbled by 5% once its activities in the options market were revealed, cutting its market cap by $7bn. In any case, even if the deals make money, this is “beside the point”: SoftBank investors can bet on publicly-traded US tech stocks “without Son’s assistance”.

A poor record

It’s hard to disagree with investors who feel that not only is Son’s gambling luck unlikely to hold, but his company also shouldn’t be behaving like a “drunken hedge fund”, says Nils Pratley in The Guardian. After all, Son’s record on timing market movements over short periods “does not impress” given that he lost $70bn during the dotcom crash in the 2000s.

The entire episode suggests that Son now prefers the “fun” of “leveraged bets and short-term risk-taking” to the more complicated task of finding long-term opportunities. These latest revelations not only raise questions about Son’s judgement, which had been called into question before, but also underlines concerns about how “poorly governed” and “financially opaque” the Japanese tech group is, says Lex in the Financial Times. Even before the latest debacle, SoftBank’s reports were just a “mish-mash” of valuation swings – many of which have proven to be wide of the mark – and extracts from the reports of companies Softbank invested in. Investors need to realise that, despite SoftBank’s public listing and retail investor base, it is little more than a “big hedge fund”.

All these problems have resulted in SoftBank having a “deep discount” to its stated net assets, says Jacky Wong in The Wall Street Journal. Ironically, this discount had started to narrow from its March peak thanks to the prudent decision to sell or monetise $42bn-worth of assets to buy back shares and redeem debt. All the progress looks set to be reversed as the “lack of transparency” on this new investment gambit widens this discount further.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri