Hong Kong regulators have applied emergency brakes, transforming the 2x long SK Hynix product into a "maximum 2x" structure. This has sparked intense debate across the industry about the rationale behind reducing leverage.
For the Hong Kong leveraged and inverse product market, the CSOP SK Hynix Daily Leveraged (2x) Product (referred to as the 2x long SK Hynix ETF) was a phenomenon of "burning oil," where the AI wave created a myth of massive single-stock leveraged ETF growth. However, the sharp decline in the underlying stock led to a cliff-like drop in net asset value due to the 2x leverage.
Against this backdrop, a new regulatory directive has thrust this product, which once boasted a scale of over HKD 100 billion, into the center of a storm.
The 2x Long SK Hynix ETF's Shift from Summer to Winter
The market's fervor and cruelty have been fully displayed in this leveraged product. As a benchmark product of the AI memory bull market, the 2x long SK Hynix ETF has ridden the AI wave to become a standout star in the Hong Kong market since its listing in October 2025.
Leveraging SK hynix's dominant position in the HBM (High Bandwidth Memory) field, the product's scale surged past the HKD 100 billion mark within just eight months. It not only became the world's largest single-stock leveraged ETF but also a favored investment tool for countless retail investors chasing wealth effects.
However, leverage is a double-edged sword. When the underlying asset enters a downward channel, the destructive power of 2x leverage is equally astonishing. The trigger was pulled in late June 2026. The South Korean market initiated a fierce deleveraging cycle to curb overheated speculation.
SK hynix, which had seen significant gains, was hit hardest. Its stock price reversed direction after hitting an all-time high on June 25. On July 29, the company's second-quarter earnings report fell short of expectations, causing the stock to plunge over 19% intraday and close down 9.61%, representing a decline of nearly 46% from its peak.
Amplified by the leveraged product, the 2x long SK Hynix ETF plummeted over 28% intraday on July 29, eventually closing down nearly 14%. Over a longer timeframe, the fund has fallen 78.77% from its late June peak, with a maximum drawdown exceeding 86%. Investors lamented that the "South Korean girl's summer has directly turned into winter."
The sharp decline in net asset value led to a collapse in scale. As of July 28, the latest scale of the 2x long SK Hynix ETF had shrunk to HKD 31.92 billion, a staggering evaporation of over HKD 100 billion from its peak of HKD 132.072 billion on June 22, representing a 75.8% reduction.
Interestingly, the total fund shares of the product actually increased counter-cyclically during the decline, reaching 826 million shares, an increase of 128 million shares from the peak scale period. This indicates that a large amount of capital entered the market during the crash, betting on a rebound.
The "Deleveraging" Driven by Regulation is About to Begin
The collapse of the trillion-level product not only severely impacted investors but also alerted Hong Kong regulators to the potential systemic risks of the current fixed leverage mechanism under extreme market conditions. On July 24, the Securities and Futures Commission (SFC) of Hong Kong revised and issued a circular on listed structured funds.
Following this, on July 27, CSOP Asset Management, a major market manager, announced that starting from August 3, its leveraged and inverse products linked to 12 popular overseas stocks, including SK hynix, Samsung Electronics, Tesla, and Nvidia, will fully transition to a "flexible leverage structure."
The core of this new regulation is to change the previous fixed 2x (or -2x) leverage multiple into a "daily dynamic target" mechanism. The new rule clearly requires that products can freely adjust their leverage downwards on specific trading days based on market liquidity, swap counterparty capacity, and cost factors, without exceeding the upper limit of 2x. In extreme market conditions, leverage could even be as low as 1.1x, and inverse products could be as low as -1.1x.
Why is there such a rush to "deleverage"? The Hong Kong leveraged and inverse product market has seen significant growth since early 2026, primarily driven by individual stock leveraged and inverse products. Data previously disclosed by the SFC showed that as of May 2026, individual stock leveraged and inverse products accounted for 80% of the total assets under management and 78% of the average daily turnover in Hong Kong's leveraged and inverse product market.
The operation of such products is increasingly dependent on the ecosystem related to the underlying stocks to maintain the target leverage exposure. This means that once a 2x leverage single-stock product encounters stock volatility, it can easily lead to increased tracking deviation, exacerbating market fluctuations.
The SFC had previously made it clear that for all leveraged and inverse products, fund managers must continuously monitor the capacity of their products to ensure they can support the target leverage or inverse exposure, maintain a reasonable buffer, and promptly notify the SFC if product operations may be disrupted.
Looking at the development history, the SFC has been steadily promoting the growth and diversification of the leveraged and inverse product market since 2016, expanding the product targets from overseas, Hong Kong, and Mainland China indexes to include commodities, virtual assets, and individual stocks. In March 2025, the SFC introduced individual stock leveraged and inverse products listed overseas, and by June of that year, it included Hong Kong-listed ultra-high market capitalization stocks with high liquidity.
Clara Wu, Executive Director of the SFC's Investment Products Division, stated that the optimization measures aim to balance market development and investor protection, helping investors better understand the single-day nature and complexity of leveraged and inverse products. With the policy adjustment, the names of these leveraged and inverse products will also be updated, adding the word "maximum" to emphasize their non-fixed leverage attribute. For example, the original "CSOP SK Hynix Daily Leveraged (2x) Product" will be renamed to "CSOP SK Hynix Daily Leveraged Maximum (2x) Product."
In terms of information disclosure, the manager will announce the target leverage multiple for the next trading day after the close of each trading day to ensure transparency in trading decisions. CSOP Asset Management announced that the target leverage for the first day of the new regulation on August 3 will be disclosed to the market after the close on July 31.
Industry Discussion and Questions Arise
While the regulatory intent is to balance the development of the derivatives market and investor protection, this sudden "leverage brake" has sparked discussion among investors and the public fund industry. Several Mainland China public fund professionals have focused on this event, summarizing three main points of contention.
First, the "contract" for existing investors has been broken. Some institutional professionals stated that when subscribing to the product, investors were attracted by its high-elasticity, speculative tool nature as a "fixed 2x leverage" product. Now, at a point when the net asset value has already plummeted by nearly 80%, the sudden change to "maximum 2x" means that if the leverage coefficient is adjusted, even if SK hynix's stock experiences a strong rebound, the product's net asset value recovery speed will be significantly reduced, prolonging the time horizon for investors who bought at the peak to break even.
Second, there is the hidden surge in operating costs. The new regulation requires investors to check the target leverage multiple announced after the previous day's close before each trading day. For ordinary retail investors, this high-frequency rule confirmation will increase significant energy consumption and raise the barrier to understanding, making product operation unprecedentedly cumbersome and full of uncertainty. Admittedly, some public fund professionals have stated that this is precisely the regulator's intention—to discourage long-term holding. CSOP also reminded investors in its announcement that daily rebalancing, the volatility of the underlying stock price, and the compounding effect of daily returns over time can lead to losses over time, even if the underlying stock's performance rises (for leveraged products) or falls (for inverse products), or trades sideways.
Third, there is anxiety about the uncertainty behind "flexibility." The non-fixed leverage multiple means fund managers have gained greater discretion. At a time when market sentiment is at a low point, if the manager frequently lowers leverage based on risk control considerations, could the product lose its original "aggressiveness" and evolve into a mediocre "quasi-spot" ETF? This could deter speculative capital betting on a rebound.
However, from the risk perspective of "deleveraging," public fund professionals also offer a rationale for the policy. A Mainland China public fund risk control professional pointed out that for a 2x leverage single-stock product, when the underlying stock experiences significant volatility, the product's volatility is magnified by 2x. To hedge this risk, market makers and swap counterparties may require selling in the spot market. Once a trillion-level leverage triggers selling, it could create a negative feedback loop on the underlying stock. Flexible leverage can mitigate the impact of passive selling by proactively reducing leverage, smoothing out product and even market volatility.
Market concerns have also been validated. On July 29, after the South Korean stock market triggered circuit breakers for two consecutive days, South Korean Finance Minister Koo Yoon-cheol publicly apologized in the National Assembly, admitting regret for "introducing single-stock leveraged ETFs without careful consideration" and hinting at further tightening of relevant regulations.
CSOP Asset Management has repeatedly emphasized in its announcements that each leveraged product "is not designed to be held for more than one day." Performance over periods longer than one day may deviate from the leveraged or inverse performance of the underlying stock and may even be "unrelated." The company stated that it will strictly adhere to regulatory requirements, disclose leverage data daily, and continue to provide clear product risk warnings.
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