South Korea's stock market experienced a sharp crash amid the AI boom, with ripple effects spreading to the U.S. market.

Article author and source: Wall Street Journal

The Korean stock market experienced its most severe crash amid the global AI boom, with ripple effects crossing the Pacific and directly impacting U.S. investors—an American AI hedge fund heavily invested in SK Hynix recorded a loss of approximately 67% in July and was forced to liquidate its position to repay loans, while U.S. retail investors who entered Korean chip stocks through DRAM ETFs became the recipients of this cross-border speculative risk.

The institution most affected in this round of spillover was the hedge fund Situational Awareness, known as the "AI Oracle." According to The Wall Street Journal, the fund held substantial positions in SK Hynix’s listed shares in South Korea; its bets on Korean chip stocks contributed to approximately 67% of its losses in July, prompting it to liquidate most of its public equity portfolio to repay loans.

The cross-border pathway for U.S. retail investors is equally clear. In May of this year, Interactive Brokers became the first major U.S. brokerage to offer direct trading of Korean stocks; meanwhile, asset manager Roundhill Investments launched the DRAM ETF, focused on memory chip manufacturers, with Samsung Electronics and SK Hynix together accounting for nearly half of the fund’s market value. Within weeks, this ETF became the most successful U.S. fund launch in history in terms of new capital inflows.

In South Korea, retail investors ("ants") account for 60% to 70% of daily trading volume on the KOSPI, suffering heavy losses during a 40% plunge over six weeks, wiping out approximately $2.5 trillion in market value. This rally, fueled by faith in AI chips and leveraged instruments, provides a clear case study of cross-border speculative risk.

Hedge funds liquidate positions to repay loans, exposing concentration risk in AI chips.

Situational Awareness was founded in 2024 and is led by former OpenAI researcher Leopold Aschenbrenner. The fund gained widespread attention by employing an aggressive strategy of high exposure and high leverage on AI-related assets, delivering outsized returns. However, a broad sell-off in the AI sector in July rapidly unraveled its leveraged positions. The fund disclosed to investors that its portfolio value declined by 67% in July alone.

In his letter to investors, Aschenbrenner wrote: "We have come perilously close to permanent capital loss—closer than we could ever accept." He also stated that the fund ultimately found a solution, but never intended to find itself in such a position.

According to Reuters, citing a person familiar with the matter, the SEC is investigating the timing of margin call triggers and communications between the fund and its major lenders—including Goldman Sachs, JPMorgan Chase, Citigroup, and Bank of America—regarding leverage usage. Situational Awareness stated in a statement, "Regulators are expected to closely examine any fund with high visibility, significant returns, or particularly severe drawdowns," and added that the company "is a highly regulated institution that will fully cooperate with any regulatory requirements." The SEC and all the aforementioned banks declined to comment.

Retail investors gain exposure to DRAM ETFs, turning the most successful offering ever into a risk exposure.

The surge in South Korean semiconductor stocks was originally out of reach for most U.S. retail investors—when this memory chip supercycle began, Samsung Electronics and SK Hynix were not listed on U.S. exchanges, making direct purchases impossible through domestic brokerage accounts.

Two new tools have filled this gap. In May, Interactive Brokers became the first major broker to offer U.S. clients direct access to South Korean stocks. Around the same time, the lesser-known asset management firm Roundhill Investments launched an ETF called "DRAM," which invests in memory chip manufacturers, with Samsung and SK Hynix together accounting for nearly half of the fund’s net asset value.

Within weeks of its launch, the DRAM ETF set one of the most successful debut records in U.S. ETF history by rapidly attracting new investor capital, drawing attention from industry giants like BlackRock and Vanguard. Dave Mazza, CEO of Roundhill, said in an interview that the ETF primarily reached individual investors through social media rather than relying on traditional financial advisor networks for distribution.

However, as the Korean stock market crashed, this cross-border speculative channel quickly became a conduit for loss transmission, directly exposing U.S. retail investors to the extreme volatility of the Korean market.

Local "Ant" suffers heavy losses; leveraged ETF amplifies volatility

In May, South Korea launched its first single-stock leveraged ETFs, allowing retail investors to double down on Samsung Electronics and SK Hynix. When the market reversed, retail investors—who accounted for 60% to 70% of daily trading volume on the KOSPI—suffered heavy losses, with some investors sending wreaths to the National Assembly with banners reading, "The ants are being slaughtered—please respond, National Assembly."

Regulators subsequently halted approval of new single-stock leveraged products, doubled the mandatory cash margin requirement to approximately $21,000, and expanded mandatory online training for retail investors. The KOSPI has rebounded about 20% from its low, and the KOSPI 200 Volatility Index has declined from 86.18 on July 30 to 56.76 on Monday.

Jung Eui-jeong, head of the Korea Shareholders Alliance, which represents approximately 14 million individual investors in Korea, has called on regulators to delist single-stock leveraged ETFs and establish relief measures for affected retail investors. "To restore a normal investment environment, the government cannot stand idly by," he said. "A major intervention is needed."