Korean bulls are starting to seek "protection": It's not about not investing, but about how to continue investing with "protection".

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The South Korean stock market, which has surged by 90% this year, is undergoing a subtle shift in sentiment—bulls have not retreated, but more and more investors are adding "safety nets" to their positions.

According to a Bloomberg report on Sunday, hedge fund Golden Horse Fund Management has reduced exposure and increased derivative protection, while M&G Investments has trimmed holdings in storage chips and foundries, shifting to downstream AI supply chain investments.

Meanwhile, Bloomberg Intelligence’s analysis of iShares MSCI Korea ETF (EWY) options shows investors are actively seeking downside protection—the ETF plunged 14% in the U.S. market last Friday in a single day.

This series of moves reflects a common dilemma faced by global funds: their long-term views on Samsung Electronics and SK Hynix remain unchanged, but in a market that has risen so much and so quickly, the core challenge is how to lock in existing profits without giving up potential gains. Last Friday's selloff in U.S. tech stocks, triggered by rate hike concerns, reminded the market once again: when sentiment reverses, hot trades can unravel at astonishing speed, and this risk may spread to the Korean local market at any time.

Signals from the derivatives market: shifting from chasing gains to protecting positions

Signs of protective actions are most evident in the derivatives market.

Bloomberg Intelligence’s Global Chief Derivatives Strategist Tanvir Sandhu said, activity in EWY options shows investor demand is shifting from upside exposure to downside protection. "The debate isn't about whether the Korea Kospi story is still attractive, but about how to stay invested without giving back some gains."

Golden Horse Fund Managing Partner Yi Ling Ong revealed that over the past few weeks, the fund has been "marginally reducing overall exposure and steadily layering in derivative protection." She also pointed out that several major IPOs, including SpaceX’s expected listing this month, may trigger capital rotation and that funds need to keep cash ready to participate, so "having some dry powder is prudent."

Last Friday, the Kospi benchmark index dropped up to 7% during the session, providing a real example of this caution.

Rotation instead of retreat: seeking the “downstream of the downstream” of the supply chain

Reducing positions does not mean turning bearish—more investors are opting for structural repositioning, moving from crowded core targets to downstream sides of the value chain.

M&G portfolio manager Vikas Pershad describes this strategy as looking for "the picks-and-shovels among picks-and-shovels," i.e., those companies benefiting from AI infrastructure investment that aren’t at the core of current trades. He has cut holdings in memory and foundries to broaden his AI supply chain layout.

This logic is supported by data. Golden Horse Fund statistics show that, excluding Samsung and SK Hynix, the rest of the Kospi index components have had their expected profit growth for this year revised up from 20% in January to over 50%, signaling the earnings upgrade cycle is spreading to a broader market.

Valuations are still supported, but crowded-trade risks are not to be ignored

Despite increasingly cautious market sentiment, most investors emphasize that the fundamental logic for South Korean stocks has not been shaken.

Bloomberg data show that Kospi currently trades at 8.6 times forward earnings, below its five-year average of 10 times. Gama Asset Management’s global macro portfolio manager Rajeev De Mello said, "The speed of the rally is dizzying, but in this market environment, I'd rather let the rally continue. If you exit now and the market doesn't pull back, it'll be hard to get back in later."

Yet, risk factors are also accumulating. Global funds have net sold a record $76 billion worth of Korean stocks this year, with net outflows every trading day for the past month. The ongoing exodus of foreign capital is now being taken up by more emotional retail investors, and this structural change may amplify market volatility.

Leveraged tools expansion: retail enthusiasm coexists with tail risks

Rising retail participation brings another concern.

Optiver Asia Institutional Derivatives Sales Manager Stephane Martin said at a Bloomberg Volatility Forum panel last week that the popularity of leveraged ETFs and the Korea Exchange’s plan to launch single-stock weekly options in June are "certainly interesting" and confirm greater retail participation, but these tools also put the market "in a state of fragility in case of any reversal."

This is the core contradiction of the current Korean market: the fundamental story is intact, valuations are relatively reasonable, but the size and speed of the rally and the crowded positions mean that any external shock can trigger a nonlinear market response. For global investors, the answer isn't to exit, but to buy insurance for this potential risk while staying involved.

Risk Warning and DisclaimerThe market involves risks; investments should be made cautiously. This article does not constitute individual investment advice and does not consider specific investment objectives, financial conditions, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article suit their particular situation. Investing based on this article is at your own risk. ```