On August 6th, during the Asia-Pacific trading session, stock markets in Japan and South Korea experienced declines. The Nikkei 225 fell nearly 2% in the morning session.
The Korea Composite Stock Price Index (KOSPI) dropped over 5%, with SK Hynix falling more than 9% and Samsung Electronics declining over 6%. The Korea Exchange triggered the SIDECAR mechanism, suspending programmatic sell orders on the KOSPI. Meanwhile, the South Korean won strengthened against the US dollar to 1415.30, reaching its highest level since mid-October 2025. A stronger local currency typically weighs on domestic stock markets, but a more critical factor behind this shift is the recent tightening of regulations by South Korean authorities on single-stock leveraged products, prompting many individual investors to seek opportunities overseas. However, this pivot by South Korean retail investors is brewing both heightened personal risk and the potential to amplify volatility in foreign markets.
Korean Investors Moving Capital Abroad
After the South Korean government intensified oversight of single-stock leveraged exchange-traded funds (ETFs), local investor funds are rapidly flowing into US leveraged ETFs. According to data from the Korea Exchange's information system on the 5th, after financial regulators raised the basic margin requirements and imposed investment limits on single-stock leveraged ETFs, trading volumes in these products have shrunk dramatically. The aggregate trading value of the 16 single-stock leveraged/inverse ETFs listed in South Korea plummeted by 89.8%, from 13.0361 trillion won on July 15th (before the regulations took effect) to 1.3329 trillion won on August 4th.
In 2025, the KOSPI index surged by 76% annually, and it rose over 100% in the first half of 2026. However, after hitting an all-time high of 9,385.59 points on June 19th, the index reversed course, falling to 5,262.77 points by July 29th—a drawdown of over 43%. Single-stock leveraged products were blamed for amplifying market volatility during this sharp decline. Consequently, in the recent regulatory clampdown, entry barriers for individual investors were raised, with the basic margin requirement increasing from 10 million won (including eligible securities) to 30 million won in cash.
Despite these hurdles, South Korean individual investors remain undeterred in their appetite for leveraged ETFs, pivoting instead to overseas products like those listed in the US. Between July 15th and August 4th, the top-ranked net purchase of overseas stocks by South Korean investors was the US fund SOXL (Direxion Daily Semiconductor Bull 3X Shares), with net buying reaching $2.48789 billion. The GraniteShares 2x Long TSLA Daily ETF (TSLL) ranked sixth with net purchases of $214.36 million. The Direxion Daily South Korea Bull 3X Shares (KORU) also saw inflows of $130.95 million, placing eleventh. Data from SEIBro, a portal run by the Korea Securities Depository, also showed that after the KOSPI turned lower in June, South Korean retail investors net purchased $633 million worth of US ETFs that month. As the sell-off intensified in July, they net bought a larger $4.67 billion in US stocks, the highest monthly net buying since January's $5 billion figure.
Professor Son Jae-sung from the Department of Accounting at Soongsil University in South Korea noted that while the regulation aims to protect investors, its implementation after losses have already occurred makes it largely retroactive. "The volatility of South Korea's single-stock leveraged ETFs is excessively high, whereas the US market is relatively more stable, making it a natural phenomenon for investors to shift to overseas leveraged ETFs," he said. "Under the current structure, where regulators only restrict domestic products while leaving overseas products unchanged, the trend of concentrating on overseas investments is likely to persist."
Hidden Risks Lurking in the Shift
Professor Son also warned that moving into US-listed leveraged ETFs exposes investors to both currency fluctuation risks and the inherent volatility of products with 2x or 3x leverage structures, which can be even more volatile than their Korean counterparts. This could expose investors to significantly higher levels of risk.
This warning is far from unfounded. In the recent July, global tech stocks endured a brutal sell-off. Semiconductor and memory chip stocks, which had repeatedly hit new highs, collectively crashed in July as investors, fearing excessive capital expenditure in the AI sector, fled from the previously leading AI concept stocks. The Philadelphia Semiconductor Index fell approximately 21% in July, marking its largest single-month decline since 2008.
JPMorgan strategist Nikolaos Panigirtzoglou, citing data from Pivotal Path in a client note on the 5th, reported that long/short equity hedge funds in the tech, media, and telecom sectors lost over 10% in July. This drawdown does not yet reflect the losses from the recently high-profile Situational Awareness fund, which was forced to sell most of its public equity portfolio last week. He suggested this could be profoundly altering the market structure of tech stock trading—hedge funds' capacity to participate may structurally decline, the influence of individual investors is likely to expand further, and volatility in the tech sector could intensify as a result.
According to another JPMorgan report, global hedge funds gave back nearly 3% of their year-to-date gains in July, driven by the liquidation of tech-related trades. In the Asia-Pacific region, stock-picking funds averaged a steep loss of 9.4%. Momentum trading was the primary source of these losses, experiencing a systemic breakdown in July. The underlying logic of momentum trading is that past winners will continue to outperform. "The severe losses in July may force hedge funds to implement stricter risk management frameworks and concentration limits, thereby curbing their ability to hold highly volatile tech stocks," Panigirtzoglou stated. "If this assessment is correct, and there is a structural contraction in the tech exposure held by hedge funds, then tech stock trading will, over the long term, become more dependent on individual investors, making it more susceptible to volatility shocks from leveraged ETFs, retail options buying, and retail margin accounts."
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