The abrupt reversal of the AI bull market in South Korea has not only severely impacted SK Hynix's stock price but has also forced regulatory authorities in Hong Kong, China, and South Korea to simultaneously tighten regulations on single-stock leveraged products.
As SK Hynix's stock has fallen nearly 46% from its June peak, the net value of the once 130 billion HKD-plus, world's largest single-stock leveraged ETF—the CSOP SK Hynix Daily Leveraged (2x) Product—has seen a cumulative decline exceeding 80%, with its size evaporating by over a hundred billion HKD.
Simultaneously, the Hong Kong Securities and Futures Commission (SFC) announced adjustments to the regulatory framework for single-stock leveraged and inverse products. Effective August 3, the fixed 2x leverage will be replaced by a dynamic leverage mechanism with a maximum of 2x, sparking widespread market discussion on investor protection and product investment value.
In South Korea, following two consecutive days of market circuit breakers this week, the Finance Minister publicly apologized and announced further tightening of regulations on single-stock leveraged ETFs, considering setting an investment cap for individual investors at 20% of their total financial investment assets for such products.
Trillion HKD "Star ETF" Encounters a Waterloo
Over the past year, the AI computing power wave propelled SK Hynix to become one of the most sought-after semiconductor stocks in global capital markets, also fueling an explosion in Hong Kong's single-stock leveraged ETF market.
The CSOP SK Hynix Daily Leveraged (2x) Product, launched in October 2025, quickly attracted capital due to SK Hynix's leading advantage in the HBM (High Bandwidth Memory) field, surpassing 130 billion HKD in size within just 8 months to become the world's largest single-stock leveraged ETF.
However, high leverage equally magnifies risk.
Since the Korean market began deleveraging in late June, SK Hynix's stock price has continued to retreat. On July 29, although the company reported record profits, both revenue and operating profit fell short of market expectations. Its stock price plunged over 19% intraday, closing down 9.61%, nearly 46% below its historical high.
The corresponding 2x leveraged product suffered an even more severe drawdown.
On July 29, this ETF plunged over 28% intraday, closing down nearly 14%; since its peak on June 25, it has accumulated a decline of 78.77%, with a maximum drawdown exceeding 86%.
The fund's size has also rapidly shrunk.
As of July 28, the product's assets under management had dropped from the late June high of 132.072 billion HKD to 31.92 billion HKD, evaporating over 100 billion HKD in just over a month—a contraction of about 76%.
However, a rather peculiar phenomenon is that while the size shrank, the total fund units continued to increase, indicating significant capital chose to continue subscribing during the decline, attempting to bet on a rebound opportunity.
Hong Kong Regulation Introduces "Flexible Leverage"
Faced with the rapid expansion of single-stock leveraged product sizes and extreme market volatility, the Hong Kong SFC began adjusting its regulatory framework.
On July 24, the Hong Kong SFC revised the "Circular on Listed Structured Funds." Subsequently, CSOP announced that starting August 3, 12 of its overseas single-stock leveraged and inverse products, including those tracking SK Hynix, Samsung Electronics, NVIDIA, and Tesla, will comprehensively adopt a "flexible leverage" mechanism.
The most significant change under the new rules is the shift from a fixed leverage ratio to a dynamic target leverage.
Previously, products maintained a fixed 2x (or -2x) leverage daily; after adjustment, fund managers can autonomously decide the leverage ratio daily based on factors such as market liquidity, swap trading capacity, and transaction costs, but it must not exceed 2x, can be reduced to as low as 1.1x, and inverse products can be adjusted to a minimum of -1.1x.
Simultaneously, product names will be adjusted accordingly. For example, the "CSOP SK Hynix Daily Leveraged (2x) Product" will be renamed to "CSOP SK Hynix Daily Leveraged Up To (2x) Product" to emphasize its leverage is not fixed.
As per regulatory requirements, fund managers must announce the target leverage level for the next trading day after each market close. The leverage multiple for the first day of implementation on August 3 will be disclosed in advance on July 31.
The Hong Kong SFC stated that the optimization measures aim to balance market development and investor protection and help investors better understand that leveraged and inverse products are inherently single-day investment tools.
Data shows that as of the end of May this year, single-stock leveraged and inverse products already accounted for 80% of the asset size and 78% of the trading volume of Hong Kong's entire leveraged and inverse products market, significantly enhancing their market influence.
New Mechanism Sparks Industry Debate
Despite regulatory emphasis on risk control, the market still harbors many doubts about the "flexible leverage" mechanism.
Many industry insiders believe that for existing investors, the biggest controversy lies in the change in the product's contractual nature.
Previously, when investors purchased the product, they were essentially betting on the high elasticity brought by a fixed 2x leverage. Now, with the product changed to "up to 2x," it means managers may proactively reduce leverage during periods of extreme market volatility. If SK Hynix experiences a rapid rebound later, the ETF's net value recovery speed will be significantly slower than before, potentially further lengthening the time for investors to recoup losses.
Additionally, the new mechanism increases operational complexity for investors.
Since the leverage ratio may change daily, investors must check the target leverage multiple announced by the manager before each trading day, increasing transaction complexity and comprehension costs.
Some market participants also worry that after fund managers gain greater discretionary power, the product may gradually lose its original high elasticity characteristics, evolving into a "quasi-spot ETF" with lower volatility, thereby diminishing its appeal to risk-seeking capital.
However, some public fund risk control personnel believe the regulatory adjustment is practically necessary.
For a 2x leveraged product with a size reaching hundreds of billions of HKD, once the underlying stock experiences sharp volatility, market makers and swap counterparties may need to intensively buy and sell the stock in the spot market to maintain risk exposure, thereby further amplifying the stock's volatility and creating negative feedback.
The flexible leverage mechanism can help mitigate market impact from passive rebalancing by actively reducing leverage ratios, aiding in alleviating systemic risk.
South Korea Simultaneously Tightens Single-Stock Leveraged ETFs
As Hong Kong adjusts its regulations, South Korea has also begun comprehensively tightening regulations on leveraged ETFs.
On July 29, South Korea's KOSPI index and KOSDAQ index fell over 8% intraday for the second consecutive trading day, triggering circuit breakers—a rare occurrence in the history of the Korean market.
That evening, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho urgently convened a "F4 meeting" consisting of the Ministry of Economy and Finance, the Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service to study market stabilization measures.
According to Korean media and Reuters reports, South Korean regulatory authorities are considering limiting the scale of individual investors' investments in single-stock leveraged ETFs, with the cap tentatively set at 20% of an individual's total financial investment assets; simultaneously, they plan to increase trading costs and introduce simulated trading requirements to strengthen investor suitability management.
Previously announced measures, such as raising the minimum margin requirement to 30 million won, will also take effect starting July 31.
Notably, Choo Kyung-ho also made a rare public apology that day, acknowledging that regulators had insufficiently considered potential risks when approving single-stock leveraged ETFs, and stated that new regulatory measures would continue to be introduced if necessary.
Analysts: AI High Growth Remains, But Trading Risks Have Significantly Increased
Although SK Hynix achieved record-high revenue and profit in Q2, because it failed to meet the market's previously extremely high expectations, it ultimately became a significant trigger for this round of market adjustment.
Industry insiders believe that the Korean stock market had risen rapidly previously, driven by multiple factors including the AI industry, high-leverage capital, and policy encouragement. However, recent consecutive deleveraging by regulators has noticeably tightened market liquidity, exacerbating stock price volatility.
Analysts point out that from a medium- to long-term perspective, the fundamentals of South Korea's semiconductor industry remain relatively robust, and leading companies like SK Hynix and Samsung Electronics still possess strong profitability. However, in the short term, with multi-layered leveraged capital concentrated in the semiconductor sector, coupled with changes in the global interest rate environment and market risk appetite, the Korean stock market may still maintain relatively high volatility.
The introduction of the flexible leverage mechanism in Hong Kong and further restrictions on single-stock leveraged ETFs in South Korea also indicate that regulatory thinking is gradually shifting from encouraging innovation towards risk control.
For investors, while high-leverage products offer the possibility of high returns, it is also necessary to pay closer attention to daily leverage changes, compounding effects, and the risk of net value deviation that may occur under extreme market conditions.
This article does not constitute personal investment advice, does not represent the platform's views. The market involves risks, investment requires caution. Please make independent judgments and decisions.
This article is from the WeChat public account "Wall Street News", author: Yang Chen
