The South Korean stock market crash spills over to Wall Street: an "AI stock guru" suffered a 67% loss in a single month due to his heavy investment in SK Hynix, and the SEC has launched an investigation into leveraged trading.

The South Korean stock market experienced one of the most severe crashes in the global AI boom, and its shockwaves have crossed the Pacific Ocean, directly impacting US investors. A US AI hedge fund heavily invested in SK Hynix suffered a loss of about 67% in July and was forced to liquidate its positions to repay loans. Meanwhile, US retail investors who poured into South Korean chip stocks through DRAM ETFs became the bearers of this round of cross-border speculative risks.

The institution most impacted by this spillover is Situational Awareness, the hedge fund of the "AI stock guru." According to the Wall Street Journal, the fund held a large number of SK Hynix's South Korean-listed shares, and its bets on South Korean chip stocks were partly responsible for its approximately 67% loss in July. It has also liquidated most of its public stock portfolio to repay loans.

The cross-border path for US retail investors is equally clear. In May of this year, Interactive Brokers became the first major US brokerage firm to offer direct trading in South Korean stocks; around the same time, asset management firm Roundhill Investments launched a DRAM ETF focusing on memory chip manufacturers, with Samsung Electronics and SK Hynix accounting for nearly half of the fund's market value. Within weeks, the ETF became the most successful launch in US history in attracting new funds.

In South Korea, retail investors ("ant") account for 60% to 70% of Kospi's daily trading volume and suffered heavy losses in the six-week plunge of about 40%, wiping out approximately $2.5 trillion in market capitalization. This market rally, driven by both the belief in AI chips and leveraged tools, provides a clear example of the risks of cross-border speculation.

Hedge funds liquidate positions to repay loans, exposing the risks of concentration in the AI chip industry.

Founded in 2024 and managed by former OpenAI researcher Leopold Aschenbrenner, Situational Awareness initially gained notoriety for its aggressive, high-leverage strategy of betting heavily on AI-related stocks, achieving excess returns. However, the across-the-board sell-off in the AI sector in July caused its leveraged positions to collapse rapidly. The fund disclosed to investors that its portfolio value plummeted by 67% in July alone.

In a letter to investors, Aschenbrenner wrote, "We came closer than we could have with permanent capital loss." He also stated that the fund eventually found a solution but never intended to go down that path.

According to Reuters, citing a source familiar with the matter, the SEC is investigating the timing of the trades that triggered margin calls, as well as communications between the fund and its major lenders—including Goldman Sachs, JPMorgan Chase, Citigroup, and Bank of America—regarding leverage. Situational Awareness stated that it "expects regulators to closely scrutinize any high-profile funds with significant returns or particularly sharp drawdowns," and added that the company "is a highly regulated entity and will fully cooperate with any regulatory requirements." The SEC and the aforementioned banks declined to comment.

Retail investors are using DRAM ETFs as a conduit for the most successful ETF issuance in history, which has become a source of significant risk exposure.

The surge in South Korean chip stocks was originally out of reach for most American retail investors—at the beginning of this memory chip supercycle, neither Samsung Electronics nor SK Hynix were listed on US exchanges, and domestic brokerage accounts could not directly buy them.

Two new tools fill this gap. In May of this year, Interactive Brokers became the first major brokerage to open direct trading of South Korean stocks to U.S. clients. Around the same time, the little-known asset management firm Roundhill Investments launched an ETF, ticker symbol "DRAM," which invests in memory chip manufacturers, with Samsung and SK Hynix accounting for nearly half of the fund's net asset value.

Within weeks of its launch, the DRAM ETF attracted new investor funds at a rate that set one of the most successful ETF launch records in US history, drawing attention from industry giants such as BlackRock and Vanguard. Roundhill CEO Dave Mazza stated in an interview that the ETF primarily reached individual investors through social media, rather than through traditional financial advisor networks.

However, with the collapse of the South Korean stock market, this cross-border speculative channel quickly became a conduit for losses, exposing American retail investors who chased the rally directly to the violent fluctuations in the South Korean market.

Domestic "Ant Group" suffers heavy losses, leveraged ETFs amplify volatility

In May, South Korea launched its first batch of leveraged ETFs for single stocks, allowing retail investors to double their bets on Samsung Electronics and SK Hynix. When the market reversed, retail investors, who account for 60% to 70% of the daily trading volume on the Kospi, suffered heavy losses. Some investors sent wreaths to the National Assembly with banners that read, "Ants are being slaughtered—National Assembly, please respond."

Regulators subsequently suspended approvals for new single-stock leveraged products and tripled the mandatory cash margin requirement to approximately $21,000, while also expanding mandatory online training for individual investors. The Kospi has rebounded about 20% from its lows, with the Kospi 200 Volatility Index falling from 86.18 on July 30 to 56.76 on Monday.

Jung Eui-jeong, head of the Korea Shareholders Alliance, a group representing approximately 14 million individual investors in South Korea, called on regulators to delist single-stock leveraged ETFs and develop a relief plan for affected retail investors. "The government cannot stand idly by to return to a normal investment environment," he stated. "A major overhaul is needed."

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