The Myth of the Hundred-Billion ETF Shatters: SK Hynix Plunges, Hong Kong's "2x Long" Switches to "Flexible Leverage," South Korea Restricts Leveraged ETF Investments

The AI-driven bull market in South Korea has taken a sharp downturn, severely impacting SK Hynix's stock price and forcing regulators in both Hong Kong, China, and South Korea to simultaneously tighten oversight of single-stock leveraged products.

As SK Hynix has cumulatively fallen nearly 46% from its June peak, the net asset value (NAV) of the CSOP SK Hynix Daily Leveraged (2x) Product—once boasting assets under management (AUM) exceeding HK$130 billion and hailed as the world's largest single-stock leveraged ETF—has retraced over 80%, with more than HK$100 billion in AUM evaporating.

Meanwhile, the Securities and Futures Commission (SFC) of Hong Kong 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 cap of 2x, sparking widespread market discussion on investor protection and the investment value of these products.

In South Korea, after circuit breakers were triggered for two consecutive days this week, the Finance Minister publicly apologized and announced further tightening of regulations on single-stock leveraged ETFs, considering capping individual investors' exposure to such products at 20% of their total financial investment assets.

The Hundred-Billion "Star ETF" Meets Its 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 catalyzing an explosion in Hong Kong's single-stock leveraged ETF market.

Launched in October 2025, the CSOP SK Hynix Daily Leveraged (2x) Product rapidly attracted capital by leveraging SK Hynix's leading position in HBM (High Bandwidth Memory). Within just eight months, its AUM surpassed HK$130 billion, making it the largest single-stock leveraged ETF globally.

However, high leverage also amplifies risk.

Since late June, as the South Korean market began deleveraging, SK Hynix's share price has continued to decline. On July 29, although the company reported record profits, both revenue and operating profit fell short of market expectations. The stock plummeted more than 19% intraday before closing down 9.61%, bringing its cumulative decline from historical highs to nearly 46%.

The corresponding 2x leveraged product experienced even more severe drawdowns.

On July 29, the ETF plunged more than 28% intraday and closed down nearly 14%; since its peak on June 25, it has cumulatively fallen 78.77%, with a maximum drawdown exceeding 86%.

Fund size also shrank rapidly.

As of July 28, the product's AUM had dropped from a high of HK$132.072 billion in late June to HK$31.92 billion, evaporating over HK$100 billion in just over a month, a contraction of approximately 76%.

Nevertheless, a rather unusual phenomenon occurred: while AUM shrank, the total number of fund units continued to increase, indicating that significant capital continued to subscribe during the decline, attempting to capitalize on a potential rebound.

Hong Kong Regulators Introduce "Flexible Leverage"

Faced with the rapid expansion of single-stock leveraged product sizes and intense 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 Asset Management announced that, effective August 3, its 12 overseas single-stock leveraged and inverse products, including those tracking SK Hynix, Samsung Electronics, NVIDIA, and Tesla, would fully adopt the "flexible leverage" mechanism.

The most significant change under the new rules is the shift from fixed leverage ratios to dynamic target leverage.

Previously, products maintained a fixed 2x (or -2x) leverage daily; after the adjustment, fund managers may independently determine the daily leverage ratio based on factors such as market liquidity, swap transaction capacity, and trading costs. The leverage ratio must not exceed 2x, with a minimum of 1.1x, while inverse products can be adjusted to a minimum of -1.1x.

Concurrently, product names will be adjusted accordingly. For example, the "CSOP SK Hynix Daily Leveraged (2x) Product" will be renamed the "CSOP SK Hynix Daily Leveraged Up To (2x) Product" to emphasize that its leverage is not fixed.

Per regulatory requirements, fund managers must publish the target leverage level for the next trading day after each trading day closes. 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, helping investors better understand that leveraged and inverse products are essentially single-day investment tools.

Data shows that as of the end of May this year, single-stock leveraged and inverse products accounted for 80% of the AUM and 78% of the trading volume in Hong Kong's entire leveraged and inverse product market, significantly enhancing their market influence.

New Mechanism Sparks Industry Controversy

Despite regulators emphasizing risk control, there remains considerable skepticism in the market regarding the "flexible leverage" mechanism.

Many industry insiders believe that for existing investors, the primary controversy lies in the change to the product's contractual attributes.

Previously, investors purchasing the product were essentially betting on the high-elasticity returns provided by fixed 2x leverage. Now that the product is changed to "up to 2x," it means managers may actively reduce leverage during periods of intense market volatility. If SK Hynix experiences a rapid rebound subsequently, the ETF's NAV recovery speed will be significantly slower than before, potentially extending the period for investors to break even.

Furthermore, the new mechanism raises the operational threshold for investors.

Since the leverage ratio may change daily, investors must check the target leverage multiple published by the manager before each trading day, increasing transaction complexity and comprehension costs.

Some market participants are also concerned that with greater discretion granted to fund managers, the product may gradually lose its original high-elasticity characteristics, evolving into a lower-volatility "quasi-spot ETF," thereby weakening its appeal to capital with high risk appetite.

However, some risk control professionals from public mutual funds believe the regulatory adjustment is practically necessary.

For a 2x leveraged product with a scale reaching hundreds of billions of Hong Kong dollars, if the underlying stock experiences violent fluctuations, market makers and swap counterparties may need to concentrate buying or selling stocks in the spot market to maintain risk exposure, thereby further amplifying individual stock volatility and creating a negative feedback loop.

The flexible leverage mechanism can mitigate market impact caused by passive rebalancing by actively reducing leverage ratios, helping to alleviate systemic risk.

South Korea Simultaneously Tightens Single-Stock Leveraged ETFs

As Hong Kong adjusts its regulations, South Korea has also begun to comprehensively tighten oversight of leveraged ETFs.

On July 29, the South Korean KOSPI and KOSDAQ indices fell more than 8% intraday for the second consecutive day, triggering circuit breakers for both—a rare occurrence in the history of the South Korean market.

That evening, Ku Yoon-chul, Deputy Prime Minister and Minister of Strategy and Finance, urgently convened an "F4 Meeting" comprising the Ministry of Economy and Finance, the Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service to study measures to stabilize the market.

According to South Korean media and Reuters, South Korean regulators are considering limiting the scale of individual investors' investments in single-stock leveraged ETFs, with a proposed cap of 20% of personal financial investment assets; they are also raising trading costs and introducing simulated trading requirements to strengthen investor suitability management.

Previously announced measures, such as raising the minimum margin requirement to 30 million won, will also officially take effect on July 31.

Notably, Ku Yoon-chul rarely issued a public apology on the day, admitting 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 Boom Persists, But Trading Risks Have Significantly Increased

Although SK Hynix's second-quarter revenue and profit both hit historical highs, failing to meet the market's previously extremely high expectations ultimately became a major trigger for this round of market correction.

Industry insiders believe that the South Korean stock market had risen rapidly due to multiple factors, including the AI industry, high-leverage capital, and policy encouragement. Recent continuous deleveraging by regulators has significantly 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, with leading companies like SK Hynix and Samsung Electronics maintaining 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 South Korean stock market may continue to experience high volatility.

Hong Kong's introduction of the flexible leverage mechanism and South Korea's further restrictions on single-stock leveraged ETFs signify that the regulatory mindset is gradually shifting from encouraging innovation to controlling risk.

For investors, while high-leverage products offer the potential for high returns, they must also pay closer attention to daily leverage changes, compounding effects, and the risk of NAV deviation that may occur under extreme market conditions.