SoftBank Shutters Hedge Fund Unit Behind Infamous ‘Nasdaq Whale’ Trades

So much has changed since the summer of 2020, when a mysterious entity nicknamed “the Nasdaq Whale” (later revealed to be SoftBank acting via its internal hedge fund unit, SB Northstar) triggered an epic meltup in tech shares by gobbling up billions of dollars in call options on NASDAQ megacap companies (along with, to a lesser extent, the index and underlying stocks), forcing dealers to delta-hedge, triggering the gamma squeeze of a lifetime.

Initially, we (and others) suspected that this phenomenon was the result of retail traders run amok. But months later, after the meltup started to unravel, it was revealed that a single buyer – SoftBank – was largely driving the trend (which eventually sucked in front-running dealers and trend-chasing retail traders).

At one point, the ‘Whale’ positions became so massive that trading volume in single-stock options eclipsed the volume in the underlying.

As we explained at the time, SB Northstar’s “positive gamma” strategy played out like this: the fund bought up single name megacap tech stocks, then propelled its positions even higher by buying up massive quantities of out of the money calls in the same stocks, accelerating a gamma feedback loop (that was also fed by front-running dealers and a generation of aggressive meme-stock traders).

The massive call buying caused major distortions in implied volatility (a result of forced dealer hedging), causing a measure of the Nasdaq’s IV to soar as the index itself was surging to then all-time highs.

Nearly one year later, SoftBank followed up with the second part of this trading strategy: it dumped billions of dollars in megacap names, using the profits to plow more money into early-stage startups.

It was around this time that SoftBank’s trading strategy began to unravel as its positions moved aggressively against it as the CCP blew up Chinese stocks (SoftBank lost nearly $10 billion on its Didi position alone), SPAC stocks tumbled and the tech sector (particularly the aggressive growth plays embraced by SoftBank and ARK) tumbled as inflation soared and central banks began to telegraph their plans for hiking interest rates.

Now, as SoftBank shares tumble to their lowest level in years, forcing it to halt new investments and liquidate existing positions as founder and chairman Masa Son has seen $25 billion evaporate…

…the FT reports that SB Northstar has officially been shuttered after racking up between $6 billion and $7 billion in losses. The closure isn’t exactly a surprise: Son has been telegraphing its demise since November.

Key personnel from the fund have departed SoftBank, including Akshay Naheta, the former Deutsche Bank trader who ran the unit. He reportedly left SoftBank on Thursday, according to the FT’s sources.

Naheta became notorious for both the Nasdaq Whale trades and his bet on Wirefraud Wirecard The 40-year-old is known for executing complex derivative transactions and earned notoriety for spearheading SoftBank’s controversial bet on the shares of fraudulent payments company Wirecard. Now that he’s unemployed, perhaps he can spend more time advocating for the government to ‘socialize’ investors’ gains, something that President Biden is now trying to do with his ‘Minimum Billionaire Tax’ proposal.

This is why capitalism is breaking down! Our future includes a significant increase in taxes to counter these government-backed bailout policies at any sign of “trouble”. ⁦The Fed’s policies have exacerbated inequality and tensions in the social fabric. https://t.co/H8UmloRhhK

— Akshay Naheta (@Akshay_Naheta) July 5, 2020

Regulatory filings show that SB Management (Northstar’s investment management unit) had a little over $1 billion in US-listed stocks as of the end of 2021.

That’s down from more than $17 billion one year earlier. The bulk of its remaining positions were in special purpose acquisition companies, including vehicles sponsored by Elliott Management, Vision Fund investor Mubadala and SoftBank’s own Vision Funds.

Importantly, roughly one-third of the hedge fund unit’s money came not from SoftBank, but from Masa Son’s personal fortune. Last year, Son revealed that his holding in Northstar had personally cost him about $1.5 billion, a figure that would have increased given the further losses incurred unwinding its portfolio.

As SoftBank starts to more closely resemble a melting ice cube (having reportedly suffered more than $20 billion in portfolio losses during Q1 alone), the closure of SB Northstar is just the latest sign that we were on to something back in October 2019 (nearly a year before ‘the Nasdaq Whale’ trades began) when we suggested that SoftBank might be the tech bubble era’s “short of the century”.

But while Masa Son’s personal fortune is closely tied up in SoftBank shares (which the firm has used as collateral to leverage its investments by borrowing against its shares, setting the company up for a brutal margin call as nervous lenders demand more repayment, forcing more liquidations that could push the company into a vicious feedback loop), Japanese retirees (who are among the biggest investors in SoftBank) could also be on the hook for billions of losses.

Since allowing SoftBank to fail would be massively unpopular in Japan, we can’t help but wonder: how much more pain will the Japanese government tolerate before pushing the BoJ to bail out the telecoms giant/VC investor/’conductor of the AI revolution’ since it’s now officially ‘too big to fail’?

Which central bank will bail out Softbank

— zerohedge (@zerohedge) November 5, 2019