SK Hynix Soars 30% in a Day, Wall Street Begins to Worry

Barron's reported that South Korea's artificial intelligence (AI) and memory stocks rebounded strongly on Friday (31st), with SK Hynix (000660-KR) surging 30% in a single day and Samsung Electronics (005930-KR) climbing approximately 27%, propelling the South Korean Composite Stock Price Index (KOSPI) to a near 18% spike. However, this sharp rebound highlights the prevalence of leveraged trading in Korean equities, potentially exacerbating market volatility.

SK Hynix closed Friday at 1.718 million Korean won per share, equivalent to about $1,197, marking a cumulative gain of over 500% in the past 12 months. Samsung Electronics, another major memory manufacturer, also rose sharply, with both companies serving as primary drivers behind the KOSPI's surge.

As of Friday's close, the KOSPI has risen approximately 57% year-to-date, making it one of the world's strongest-performing major stock markets. However, the ascent has been far from smooth.

Data shows that three of the index's four largest single-day declines over the past 10 years occurred within the last five weeks, indicating a clear rise in short-term market volatility.

Barron's notes that South Korean retail investors have recently been aggressively buying SK Hynix and other tech stocks, while increasing their use of leveraged ETFs. These products use derivatives such as options and swap contracts to amplify the daily price movements of underlying assets. On market downturns, losses are similarly magnified, and daily rebalancing can lead to long-term return erosion.

Markets had initially hoped that the recent pullback in AI stocks, combined with rising regulatory and political pressure in South Korea, would dampen investor appetite for leverage and stabilize the broader market.

However, the extreme gains seen in SK Hynix and Samsung Electronics on Friday suggest that Korean investors still have substantial funds waiting to enter the market. If investors, seeking to recoup prior losses, redeploy capital into leveraged ETFs, future volatility could reignite.

Nonetheless, the sharp swings in Korean stocks do not necessarily mean investors should avoid SK Hynix's American Depositary Receipts (ADRs) traded in the U.S. The company's ADR rose about 2% in pre-market trading Friday, reaching $151.97, with every 10 ADR units representing one share of South Korean common stock.

Due to strong demand from U.S. investors and restrictions on converting between ADRs and Korean common shares, SK Hynix's ADR has long traded at a significant premium to its underlying stock.

Barron's previously maintained a positive outlook, suggesting that compared to U.S. memory giant Micron (MU-US), SK Hynix's ADR could be a lower-cost way to participate in the memory upcycle.

Additionally, Situational Awareness, a hedge fund focused on AI investments led by Leopold Aschenbrenner, has recently been reported to be selling off most of its equity portfolio.

The fund previously held a large position in SK Hynix and is reportedly under pressure to sell shares due to funding needs. If this potential selling pressure is gradually absorbed, it could alleviate future burdens on SK Hynix's ADR performance.