The sharpest crash of the global AI boom has unfolded in South Korea's stock market, and its shockwaves have crossed the Pacific to hit US investors directly. An American AI-focused hedge fund heavily positioned in SK hynix recorded a roughly 67% loss in July and was forced to liquidate positions to repay loans, while US retail traders who poured into Korean chip stocks through a DRAM ETF have become the bearers of this cross-border speculative risk.
Among the institutions hardest hit by this spillover is the "AI stock guru" hedge fund Situational Awareness. According to reports, the fund held a large number of SK hynix shares listed in South Korea, and its wager on Korean chip stocks contributed to the approximate 67% loss in July, prompting it to liquidate most of its public stock portfolio to settle debts.
The cross-border path for US retail investors is equally clear. In May, Interactive Brokers became the first major US brokerage to offer direct trading in Korean equities. Around the same period, asset manager Roundhill Investments launched a DRAM ETF focused on memory chip makers, with Samsung Electronics and SK hynix together accounting for nearly half of the fund's holdings. The ETF became one of the most successful launches in US history in terms of new capital inflows within weeks.
In South Korea, retail investors, known as "ants," account for 60% to 70% of daily Kospi trading volume and have suffered heavy losses during the roughly 40% plunge over six weeks, with market value eroding by about $2.5 trillion. The rally, driven jointly by AI chip conviction and leveraged tools, offers a clear case study in cross-border speculative risk.
Hedge Fund Liquidates to Repay Loans, Exposing AI Chip Concentration Risk
Situational Awareness, founded in 2024 and led by former OpenAI researcher Leopold Aschenbrenner, gained fame for aggressive strategies with high positions and high leverage while betting on AI-related assets. However, the broad sell-off in the AI sector in July quickly dismantled its leveraged positions. The fund disclosed to investors that its portfolio value fell 67% in July alone.
Aschenbrenner wrote in a letter to investors, "We came closer to permanent capital loss than we are comfortable with." He added that the fund ultimately found a solution but never intended to find itself in that situation.
According to Reuters citing a source familiar with the matter, the SEC is investigating the timing of trades that triggered margin calls and communication records with the fund's primary lenders, including Goldman Sachs, JPMorgan, Citigroup, and Bank of America, regarding leverage use. Situational Awareness stated in a statement that it "expects regulators to closely scrutinize any fund with high visibility, notable returns, or particularly sharp drawdowns" and described itself as "a strictly regulated institution that will fully cooperate with any regulatory requirements." The SEC and the banks declined to comment.
Retail Traders Enter Through DRAM ETF, Most Successful Launch Becomes Risk Exposure
The surging rally in Korean chip stocks was initially out of reach for most US retail investors. At the start of the memory chip supercycle, neither Samsung Electronics nor SK hynix was listed on US exchanges, preventing direct purchases through domestic brokerage accounts.
Two new tools filled that gap. In May, Interactive Brokers became the first major broker to open direct Korean stock trading to US clients. Nearly simultaneously, the lesser-known asset manager Roundhill Investments launched an ETF focused on memory chip makers, ticker "DRAM," with Samsung and SK hynix combined representing nearly half of the fund's net asset value.
The DRAM ETF set one of the most successful launch records in US ETF history by the speed of new investor capital inflows within weeks of its debut, drawing attention from industry giants like BlackRock and Vanguard. Roundhill CEO Dave Mazza said in an interview that the ETF reached individual investors primarily through social media rather than traditional financial advisor networks.
However, as the Korean market crashed, this cross-border speculative channel quickly became a conduit for losses, exposing US retail traders who chased the rally directly to the sharp volatility of the Korean market.
Local "Ants" Suffer Heavy Losses, Leveraged ETFs Amplify Swings
South Korea launched its first single-stock leveraged ETFs in May, allowing retail investors to double down on Samsung Electronics and SK hynix. When the trend reversed, the retail investors who account for 60% to 70% of daily Kospi volume were severely hit, with some sending wreaths to the National Assembly bearing banners reading "Ants are being slaughtered—Congress, please respond."
Regulators subsequently suspended approvals for new single-stock leveraged products, tripled the mandatory cash margin to approximately $21,000, and expanded mandatory online training for individual investors. The Kospi has rebounded about 20% from its low, while the Kospi 200 volatility index fell from 86.18 on July 30 to 56.76 on Monday.
Jung Eui-jeong, head of the Korea Shareholder Alliance, a group representing about 14 million individual investors in South Korea, called on regulators to delist single-stock leveraged ETFs and devise relief plans for damaged retail traders. "To return to a normal investment environment, the government cannot stand by," he said. "Major surgery is needed."