#What happens when major stocks dominate an index?
When two of the largest companies in a market represent nearly 40% of the entire index, it creates significant concerns among banks involved in the trading of these stocks. This situation is currently evident with Samsung Electronics and SK Hynix, as major prime brokers become cautious in extending leveraged exposure to hedge funds gravitating towards Asia's AI chip leaders.
#Why does leverage matter?
The combined influence of Samsung and SK Hynix, which accounts for around 40% of the Kospi Index and nearly half of the MSCI Korea Index, signifies that movements within these stocks can shake the whole market rather than just individual portfolios. Currently, Hong Kong-listed leveraged ETFs related to these companies are managing about $3.3 billion in assets. South Korea recently introduced multiple single-stock leveraged ETFs linked to these stocks, attracting noteworthy foreign inflows right from the start.
During the selloff on May 15, 2026, the activity linked to rebalancing these leveraged ETFs contributed significantly to the daily trading volumes—about 17% for SK Hynix and 10% for Samsung.
#What are the implications for banks?
Recent performance from Samsung and SK Hynix was propelled by soaring demand for advanced semiconductors and high-bandwidth memory, driving substantial gains. The rapid expansion of leveraged ETFs, both in Hong Kong and domestically in South Korea, has introduced an additional mechanical selling pressure that wasn't seen previously.
#How does reduced prime brokerage access impact investors?
For hedge funds, the tightening of prime brokerage financing translates to higher costs and smaller positions in these stocks. Nevertheless, several hedge funds maintain their belief in the potential of both companies despite the volatility in the market. For retail investors in South Korea, who have quickly embraced the new leveraged ETFs, caution is advisable. Initial inflows into these products have been staggering, exceeding a trillion won shortly after launch.
However, it is crucial to note that the 2x daily return products are designed for short-term trading rather than being suitable for a buy-and-hold strategy. Volatility drag, which refers to the degradation that occurs when a leveraged product compounds daily returns over time, can significantly reduce capital, even in stable market conditions.
To maintain their target returns, a 2x leveraged ETF must increase its exposure during market upturns and decrease it during downturns. When such products make up a considerable share of daily volume, their mechanical trades can overpower fundamental market flows. This dynamic was already observable during the May 15 selloff, highlighting the intricate relationship between leveraged ETFs and underlying market activity.