Business Insider The Kospi's historic selloff and an AI fund's collapse show how leverage can turn market swings into meltdowns.
- South Korea's Kospi slid again after July's historic market rout.
- Situational Awareness's meltdown reveals a similar risk behind the selloff.
- Saxo says leverage and big bets can turn a correction into a collapse.
South Korea's stock market was back in the red on Monday, extending a turbulent stretch after July's historic selloff.
On Monday, the country's benchmark Kospi index closed 5% lower as index heavyweights Samsung Electronics and SK Hynix both ended 9% lower.
The declines reversed part of Friday's record rebound, when the Kospi surged 178% — its biggest one-day percentage and point gain on record.
That dramatic swing followed a brutal July, when the benchmark suffered one of its steepest monthly declines on record. The selloff triggered repeated trading halts as investors who had borrowed money to buy stocks were forced to sell into a falling market, leaving the Kospi roughly a third below its June peak.
The turmoil also exposed the risks of South Korea's fast-growing market for single-stock leveraged exchange-traded funds, which allow investors to make amplified bets on companies such as Samsung Electronics and SK Hynix.
Concerned that the products were fueling speculation, South Korean regulators have temporarily suspended new listings of such products, banned financial firms from advertising them, and raised the minimum cash deposit required for retail investors.
"Leverage can amplify returns, but it also amplifies losses. More importantly, it increases the risk of being forced to sell during periods of market stress," Charu Chanana, chief investment strategist at Saxo, wrote in a note on Monday.
The same investing trap also caught institutional investors.
AI hedge fund Situational Awareness, founded by Leopold Aschenbrenner, lost 67% in July. It was forced to sell most of its public equities portfolio to Ken Griffin's Citadel due to margin calls.
The fund had used borrowed money to build concentrated positions in AI-related companies, including SK Hynix, CoreWeave, and SanDisk.
"The KOSPI selloff and the collapse of Leopold Aschenbrenner's AI fund tell the same story: when strong conviction is combined with excessive concentration and leverage, even a temporary market correction can quickly spiral into forced selling and heavy losses.," Chanana wrote.
She said the episodes did not undermine the long-term investment case for artificial intelligence. Instead, they underscored the importance of portfolio construction and risk management.
"AI remains one of the most important long-term investment opportunities of this decade. But even the strongest themes can become crowded, expensive and vulnerable to corrections," she wrote.
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