Summary of Key Points
The stock price of SK Hynix, a leading Korean AI chip company, has plummeted by nearly 46% since its peak in June. This has caused the net value of a Hong Kong ETF with a leverage of 2 times and a size once exceeding HK$130 billion to shrink by more than 80%, resulting in a loss of over HK$100 billion in market value. Regulatory authorities in both Hong Kong and South Korea have simultaneously tightened rules on leveraged products targeting individual stocks. In Hong Kong, the leverage has been changed from fixed at 2 times to dynamic (with a maximum of 2 times), while South Korea plans to limit the proportion of such products that individual investors can hold (to no more than 20% of their total financial assets), sparking debates about "investor protection" versus "product attractiveness." Despite the long-term prosperity of the AI industry, the risks associated with high-leverage trading have significantly increased in the short term.
I. The Billion-Dollar Star ETF Collapsed: How Does Leverage Amplify Risks?
SK Hynix is a key supplier of AI computing power, particularly HBM (High Bandwidth Memory) chips. Its stock price soared over the past year due to the AI boom, and the "SK Hynix Daily 2x Leveraged ETF" launched by Southern East Capital in Hong Kong became extremely popular—its size exceeded HK$130 billion within just 8 months, making it the largest single-stock leveraged ETF in the world.
However, leverage is a double-edged sword. When South Korea began to reduce leverage in June, SK Hynix's stock price continued to decline. Although the company reported record profits on July 29, its revenue fell short of expectations, causing the stock price to plummet by nearly 10% that day, and the ETF’s value dropped by more than 46% overall. The 2x leveraged ETF fared even worse, with a one-day drop of up to 28% and a cumulative loss of over 86%, reducing its size from HK$132 billion to HK$319 billion (a loss of HK$100 billion).
Interestingly, the number of shares in the ETF increased despite the overall market decline. Many investors believed the stock price had hit rock bottom and continued to buy in hopes of a rebound, but with high leverage, it became increasingly difficult to recover their losses. For example, if the underlying asset drops by 46%, a 2x leveraged ETF would not only lose 92% in value but, due to daily compounding, actually lose more than 80%. To break even, the asset price would need to rise by four times, which is extremely challenging.
II. Hong Kong Regulators Change Rules: From Fixed Leverage to Dynamic Leverage
The Securities and Futures Commission of Hong Kong (SFC) was concerned about the large size of leveraged products (accounting for 80% of the overall leveraged market) and the potential for systemic risks caused by their volatility. On July 24, it announced changes to the rules, effective August 3: the leverage would no longer be fixed at 2 times but would now range from 0 to a maximum of 2 times depending on market conditions (such as low liquidity or high transaction costs).
In simple terms, while the ETF previously maintained a constant leverage of 2 times regardless of market movements, managers could now adjust it down to 1.1 times based on market circumstances. The name of the product was also changed from "Daily Leverage (2x)" to "Daily Leverage (up to 2x)" to clarify that the leverage was not fixed.
Why this change? For instance, when SK Hynix’s stock price plummeted, the leveraged ETF would need to rebalance its holdings, potentially exacerbating the decline. Dynamic leverage allows for proactive adjustment of the leverage level, reducing the impact on market stability.
III. South Korean Regulators Take Even Stricter Measures
The situation in South Korea was even more severe: On July 29, the market triggered circuit breakers for two consecutive days (with the index falling by over 8%), a rare event in South Korean history. The Finance Minister held an emergency meeting and publicly apologized, acknowledging that the risks associated with single-stock leveraged ETFs had not been fully considered when they were approved.
South Korea’s measures are more direct: it plans to limit the amount that individual investors can invest in such products to no more than 20% of their total financial assets and has increased the required trading margin (to HK$30 million) while requiring a trial trading period. These steps aim to protect retail investors from excessive losses.
IV. Market Debate: Do New Rules Protect Investors or Harm Products?
The new rules have sparked intense debate:
- Investors' Complaints: They argue that the new rule, which limits leverage to a maximum of 2 times, means a potential slower recovery if SK Hynix’ stock price rebounds. Additionally, the daily monitoring of leverage levels makes trading more complicated.
- Risk Managers' Support: They believe that leveraged products with large volumes can cause the spot market to collapse if they experience significant fluctuations (for example, an ETF buying into a stock could drive its price up sharply, while selling off could cause a sharp drop). Dynamic leverage can help mitigate such "butterfly effects" and prevent systemic risks.
In essence, regulators are focused on preventing problems, while investors are concerned about potential profits. This contradiction highlights the challenges of high-leverage trading.
V. AI Remains Popular, but High-Leverage Strategies May Be on the Decline
Analysts point out that SK Hynix’s fundamentals are not actually that poor (its profits in the second quarter were record-breaking). The long-term outlook for the AI industry is still positive, but short-term issues include excessive leverage usage in the semiconductor sector, combined with high global interest rates and reduced risk appetite, leading to greater volatility.
The regulatory actions in both regions indicate a shift from a focus on encouraging innovation to a greater emphasis on risk management. For individual investors, using leveraged products will require more caution. They must not only monitor the performance of the underlying assets but also keep track of daily leverage levels. The notion that "2x leverage means a guaranteed 100% return" is no longer valid; in extreme market conditions, high leverage can lead to substantial losses.
Conclusion: The boom in AI-related investments driven by high leverage has come to an end, as regulators begin to curb its excesses. Investors seeking quick profits should be aware that high returns always come with higher risks. Leverage is not a magnifier but an accelerator—it can amplify both gains and losses significantly.