Recently, the South Korean market has experienced drastic fluctuations, with the KOSPI index having a maximum drawdown of 32% since its peak of 9385.6 points on June 19.
As the most concentrated “storm center” in the current global AI market, the adjustment in the South Korean market has become an important trigger for fluctuations in global tech stocks, with a general adjustment observed in technology stocks worldwide.
In terms of rhythm, this round of decline began due to disturbances in fundamental expectations and periodic rotations of funds,but the core variable that truly amplified the decline is the highly concentrated leverage structure in the Korean market.
It is noteworthy that,from the current perspective, the fundamentals of the Korean market have not undergone fundamental changes, while the passive deleveraging process driven by leverage has entered its final stage.
Deleveraging progress of leveraged ETFs at 75%
The core trigger for this round of market fluctuations is the massive expansion and concentrated clearing of leveragedETFs.
During the previous rapid rise of the stock market, the scale of leveragedETFs approached 50 billion USD at one point, which represented about four times the ratio of the total market capitalization of the South Korean stock market compared to the US market, significantly amplifying the endogenous volatility of the market.
This high-leverage structure means that price fluctuations are no longer solely driven by fundamentals but are now more dominated by position structures.
The high volatility, on one hand, suppressed the entry of long-term funds sensitive to fluctuations, while on the other hand, significantly increased the operational difficulty for asset management institutions and brokerages under risk control constraints.
Entering June and July, the global AI hardware sector weakened, coinciding with the “daily rebalancing” mechanism of leveraged ETFs, characterized by: passive accumulation during upward trends and concentrated reduction during downward trends. Once leading stocks show a correction, it easily triggers a negative feedback loop of “price decline → margin call → forced liquidation → further price decline.”
In late June, several leveraged ETFs saw daily declines exceeding 25%, triggering the market’s circuit breaker mechanism, with the volatility indicator VKOSPI soaring to five times the VIX index of the US stock market, and market liquidity nearing exhaustion in phases.
According to institutional estimates, the current scale of leveragedETFs has rapidly shrunk from about 50 billion USD at its peak to 26 billion USD, with cumulative reductions of about 24 billion USD.Based on an estimated reasonable stock level of about 18 billion USD, the current deleveraging progress has reached about 75%, with approximately 25% of remaining adjustment space, significantly narrowing.
Meanwhile, the regulatory authorities have begun to restrict leverage expansion from an institutional level.
Regulatorystrict new rules to be implemented from August:Starting from August 5, all new single stock leveraged ETF products will be suspended; the minimum cash trading threshold will be raised from 10 million KRW to 30 million KRW, and from August 19 onwards, only cash can be used as the initial margin; starting in November, the minimum trading unit for single stock leveraged ETFs will be increased from 1 lot to 20 lots.
As the policies gradually take effect, new channels for high leverage funds to enter the market have been effectively blocked, and the scale of leveragedETFs is expected to further shrink, reducing the mechanism risk that amplifies volatility from the source.
Hedge funds deleveraging exceeds 50%
Besides leveragedETFs, the high leverage configuration of hedge funds is also an important amplifier of this round of fluctuations.
Since April of this year, global equity and macro hedge funds have significantly increased their allocations to the South Korean market, amplifying their stock exposure through swap transactions provided by brokerages (Total Return Swap). During the rising phase of the market, this structure significantly enhanced market resilience; however, during the correction phase, it also amplified the deleveraging pressure.
As the index falls and the memory chip sector underperforms the market, the issue of tight swap quotas has noticeably eased.
Institutional estimates indicate that thelong-short position ratio has fallen from a peak of about5.5 times to below 4 times; if we use the extreme period of about 7 times the long-short ratio and a corresponding net long position of 6 times as a reference, the current net long level of about 3 times indicates that leverage has decreased by over 50%.
At the same time, as the decline in stock prices leads to a reduction in MSCI index weight, the forced selling pressure of passive index funds has been largely released, and the liquidity panic risk on the institutional side has significantly eased.
Overall, the “passive deleveraging” process on the hedge fund side has completed its most intense phase.
Korean household financing is not the main source of risk
Compared to leveragedETFs and hedge funds, Korean household financing has relatively limited contribution to systemic risk.
Currently, the balance of household financing in South Korea has decreased from previously exceeding25 billion USD to about 21 billion USD, accounting for about 0.5% of the total market capitalization of the South Korean stock market. This level is not only lower than the US market's approximately 1.9%, but also significantly below the A-share market's approximately 2.8% financing ratio.
Structurally, household financing is more concentrated in small- and medium-sized stocks that occupy a higher proportion of theKOSDAQ market, with relatively limited direct impact on core weighted stocks in the KOSPI.
More importantly, ordinary financing accounts do not possess the “mechanical rebalancing” mechanism similar to leveragedETFs.During the price decline process, investors do not need to passively reduce positions quickly, making it difficult to form a chain reaction of selling.
Additionally, the asset structure of Korean households still includes cash, overseas assets, and previously accumulated stock profits, providing some buffer space.
Therefore, from the perspective of transmission mechanisms, household financing is unlikely to become the core variable triggering systemic risk, nor is there a realistic basis for large-scale chain liquidations.
In summary, the deleveraging process in the South Korean market can be clearly summarized as follows: leveragedETFs have deleveraged about 75%, hedge funds have deleveraged over 50%, household financing risks are manageable, and foreign passive selling pressure has been basically released.
Compared to the initial stages of the decline, the high-leverage structure that is most prone to trigger “chain selling” has completed the majority of its clearing. The market is gradually transitioning from a “liquidity-driven decline” to a “fundamentals-driven pricing.”
In this context, as long as there is no trend reversal in the fundamentals, this round of adjustments is closer to a concentrated clearing of crowded trades rather than the end of the AI trend.
Conclusion
Looking longer, we must firmly believe: The trend of AI is irreversible, silicon-based is irreversible.
Nearly all technological revolutions in history undergo a similar path: first, a certain narrative is established, followed by a rapid influx of funds, and then due to excessive crowding and leverage amplification, triggers severe fluctuations; finally, real chip reconstruction is completed during the clearing process. Each decline appears to be a price retraction on the surface, but essentially is a structural optimization.
This time is no exception.
The reason the South Korean market has become the storm center is not because it is weaker, but precisely because it stands at the most core position of the AI industry chain——the memory chips. Funds first flock to the most certain places, and it is there that crowding is easiest to form. When leverage is superimposed, volatility ceases to be a risk and becomes a certainty.
But now, the most dangerous phase is passing.
What we really need to consider now is not the short-term ups and downs, but: is this track still in place?
If the answer is affirmative, then volatility is a cost, not a risk.
The overarching trend of AI has not changed due to this round of adjustments. Demand for computing power continues to grow exponentially, large models are still accelerating their iterations, and every link in data centers, optical communication, and advanced packaging is expanding. This is not an industrial path that can be easily invalidated but a productivity revolution that is unfolding.
It can even be said——there is no turning back now.
Our generation actually does not lack effort, but lacks an “entry point” for the dividends of the era. Many people looking back at their parents' generation often feel a complex emotion: during the reform and opening-up, it seemed that there were opportunities everywhere; those involved in industry, venturing into the sea, and engaged in trade, many seized one opportunity and changed their lives.
You might have also asked: why were they able to, and why can't we?
But the issue lies in that the opportunities for each generation take different forms.
Today's opportunities are no longer about opening factories or doing trade, but about standing on the wave of technology and participating in industrial upgrades through capital.AI is not an opportunity for a single company, but rather the dividend mechanism of the whole era is being reconstructed.
Chips, large models, computing networks, optical modules—these fields sound complex and require high thresholds, which indeed cannot be easily participated in by ordinary people through“direct involvement.” However, the capital market precisely provides a pathway—you do not need to become an engineer or an entrepreneur; you just need to understand trends and participate.
What truly matters is not whether you can accurately select every target, but whether you are standing in the right direction.
If the direction is right, volatility is merely a process; if the direction is wrong, no amount of effort will yield results.
So returning to the most fundamental question——
If AI is ultimately proven to be wrong, then our generation may have truly lost the most important opportunity; but if it is right, then every adjustment now provides an opportunity for those who come after to get back on board.
The market will not stop because of your hesitation, and the era will not slow down due to your uncertainty.
The only decision you need to make is whether to get on board.
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