Key points
- The Kospi rebounded about 11% in the week to August 14 and closed at 6,977.94, but the rally came too late for investors who bet with borrowed money, many of whom were already forced to sell near the July 30 low.
- A rebound doesn't make a single-stock leverage fund whole. DB Securities estimates a bad entry in the SK Hynix 2x fund could take close to five years to break even, because the daily resets erode it during a long slide.
- Even as the two chip stocks climbed, individual investors kept selling the Samsung and SK Hynix leverage funds and buying inverse funds that gain when the market falls.
The Kospi had one of its best weeks in memory. It rose about 11% in the five sessions to August 14, closed at 6,977.94, and early on Friday it climbed past 7,000 for the first time in about three weeks before slipping back. Foreigners did the heavy lifting, buying 3.04 trillion won ($2.14 billion USD) of stock on Friday while individuals sold 1.98 trillion won ($1.4 billion USD). A soft US inflation reading overnight had lifted hopes that the Federal Reserve will hold rates next month, and Korean chip, car and shipbuilding names all rose with it. Samsung Electronics ended the day at 274,500 won ($193 USD) and SK Hynix at 1,645,000 won ($1,158 USD).
For a lot of people back home, none of that helped. The rebound arrived after they were already out, and it arrived in a form that couldn't save the ones still holding on.
To see why, you've got to look at what July did to the people who'd borrowed to invest. The Kospi fell about 44% from its June high to its July 30 low, and that kind of drop is brutal for anyone on margin. Credit-loan balances, the money individuals borrow from brokers to buy shares, dropped about 10 trillion won ($7 billion USD) from a June 24 peak of 38.6 trillion won ($27.2 billion USD) down under 29 trillion won ($20.4 billion USD) by the end of the month. That's not investors calmly taking profits. A lot of it was forced. When a leveraged account falls below its margin, the broker sells the stock the next morning whether the owner wants to or not, and those forced sales ran over 100 billion won ($70 million USD) a day at the worst of it. On June 9 the share of unpaid margin that ended in a forced sale hit 10.5%, and six of the ten heaviest forced-selling days of the year came after May 27, the day the Samsung and SK Hynix single-stock leverage funds started trading.
So by the time the market turned, many of the most leveraged accounts had already been emptied at the bottom. They sold, or were sold out, near 5,262 on the Kospi. The index is now above 6,900. They weren't there for any of it.
Why a rebound doesn't make a leveraged fund whole
Investors who managed to hold on now face a different kind of damage. A single-stock leveraged fund aims to deliver twice the stock's return for one day. The one-day limit is crucial. Because the exposure resets after every session, a long decline can erode the fund by more than twice the stock's overall loss. When the stock eventually rebounds, the fund recovers only part of the ground it gave up. An 11% week for the Kospi, or several strong sessions for the two chipmakers, can therefore do far less for a fund holder than the headline gains imply.
DB Securities (DB증권) researcher Seol Tae-hyun put a number on how long that damage can last. Seol's warning to investors who are already underwater is simple. Don't let the pain dictate the next trade. "Loss-avoidance psychology gets in the way of objective decisions about when to cut a position or reduce its size, and it drives investors to add more money without a plan," the note said.
By Seol's calculation, an investor who bought the SK Hynix 2x fund near its peak and simply held on might need around 1,260 trading days to break even. That's close to five years. Averaging down reduces the estimated wait on paper, but that's not the behavior Seol is encouraging. The concern is averaging down as an emotional response to a loss. Adding money out of fear can turn one bad position into a much larger one.
A green day on the screen doesn't reveal that five-year timeline. The underlying stock can recover while the leveraged fund built around it never catches up.
The posts nobody can look away from
The human cost has been playing out across Korean forums all month. In early August, one user uploaded a brokerage screenshot with the title "the end of going all-in on single-stock leverage." The post claimed a loss of more than 3 billion won ($2.11 million USD) in two months, wiping out about 80% of the account. According to the poster, the money had been placed in the Hynix and Samsung leveraged funds, along with 500 million won ($352,000 USD) in Samsung preferred shares bought on credit. The user insisted the screenshot was genuine. Others argued over whether to believe it. Authentic or not, the post traveled because many investors recognized the pattern behind it.
Another investor told Financial News that they had been trying to make up the remaining balance on an apartment. They put the money into the market, hoping to earn the difference, and instead lost some of the principal. The newspaper framed the story with a reference to crying tears of blood. That sounds heavy-handed in English, but it's close to the language Korean coverage has used throughout this stretch. Money set aside for a home ended up in some of the market's most volatile products at the worst possible time.
The rebound has added another layer to the frustration. Even as the market has climbed, many of the same individual investors haven't been buying the recovery. During the first half of August, while both chip stocks rose, individuals continued to sell the leveraged funds tied to them. Net sales reached about 111 billion won ($78 million USD) for the SK Hynix fund and 107 billion won ($75 million USD) for the Samsung fund.
Some investors moved in the opposite direction altogether, buying inverse funds that gain when the market falls. Kiwoom Securities researcher Han Ji-young viewed the recent strength as a snapback from oversold levels, not the start of a new trend. After being burned once, an investor could see that as a reason to keep betting against the rebound.
The market will be closed on Monday, August 17, for the substitute holiday marking Liberation Day. That leaves a three-day weekend before prices can move again. For anyone who sold at the bottom, or who still owns a fund that barely responded to a strong week, it means three days alone with a number the rebound didn't change. The Seoul market reopens Tuesday.
Sources
- 디지털데일리, 외국인 3조원 넘게 사들였다 코스피 장중 7000 돌파 6977 마감, on Friday's close and the foreign buying
- 뉴시스, 무더기 반대매매에 빚투개미 백기 신용융자 10조 줄었다, on the credit-balance collapse and forced selling
- 전자신문, 삼전닉스 레버리지 물렸다고 버티기 작전, on the DB Securities recovery estimates and the analyst comment
- 파이낸셜뉴스, 삼전닉스 몰빵 30억 날렸다 레버리지 80% 손실 인증글 진위 논란, on the disputed community post
- 파이낸셜뉴스, 아파트 잔금 보태려다 원금까지 초변동성에 피눈물 흘린 개미들, on the apartment-money investor
- 디지털타임스, 상승 베팅 개인 vs 곱버스 외국인 8월 ETF 시장 엇갈린 수급, on the early-August leverage-fund selling and the Kiwoom comment
- Our earlier coverage: the day the rule landed and the Kospi rose almost 18%, the retail anger at the deposit rule, and who was carrying the most debt into the fall
Figures are from South Korean market reporting as described above, converted to US dollars at about 1,420 won to the dollar. The analyst comment is translated from Korean. Source titles are in the original Korean. This is general market commentary and not investment advice.
