SEOUL: The Bank of Korea (BoK) is calling for stronger monitoring of overseas derivatives tied to South Korean chipmakers, warning their rapid growth risks amplifying domestic market swings as it cites leveraged bets by hedge fund Situational Awareness as a driver of recent volatility.
The South Korean market’s concentration in semiconductor stocks, foreign investors’ portfolio rebalancing and the buildup and unwinding of domestic leverage acted as drivers of the unprecedented volatility witnessed in Kospi from January to July, the central bank said in its semiannual Monetary Policy Report to parliament yesterday.
Overseas hedge funds also added to market swings by building large leveraged positions in South Korean chip stocks and unwinding them during the sharp July selloff, according to the report.
The BoK mentioned US-based Situational Awareness, a fund focused on artificial intelligence, as one example, saying it was reported to have used leverage of as much as four times while building and unwinding positions in global memory-chip companies.
The warning comes as demand for overseas products tied to South Korean chipmakers is surging. BlackRock’s US-listed South Korea exchange traded fund (ETF), which has about a quarter of its portfolio in SK Hynix Inc, attracted a record US$2.8bil in one week in July.
The BoK said such growth is creating more channels for overseas flows to affect South Korea’s domestic market.
Hong Kong listed leveraged ETFs tracking Samsung Electronics Co and SK Hynix Inc saw their market value surge more than twenty-fold in the first half, the central bank said.
Global banks hedging total return swaps with ETF managers traded Korean cash equities, futures and options, apparently amplifying domestic stock price volatility.
While the BoK did not cite specific examples, in July a freak trade in SK Hynix Inc triggered nearly US$60mil in liquidations in an offshore crypto market that highlighted the growing cross-market risks from leveraged products tied to South Korean chipmakers. — Bloomberg
