Hedge fund Golden Horse Fund Management has trimmed exposure and added derivative protection, while M&G Investments has cut memory and foundry holdings to broaden out down the AI supply chain
A wave of optimism over South Korean stocks is giving way to growing caution, as some investors hedge positions and pare back crowded trades on concerns that the rally has run too hot, too fast.
Hedge fund Golden Horse Fund Management has trimmed exposure and added derivative protection, while M&G Investments has cut memory and foundry holdings to broaden out down the AI supply chain. A Bloomberg Intelligence analysis of options on the iShares MSCI South Korea ETF shows investors seeking protection against a decline. The fund tumbled 14 per cent Friday in the US.
The moves highlight the challenge facing global money managers. While investors remain upbeat about Samsung Electronics Co. and SK Hynix Inc., the two chip giants that powered Kospi’s more than 90 per cent rise this year, many are becoming pickier about where to put new money and keeping cash ready for opportunities elsewhere.
Friday’s selloff in US tech stocks, driven by fears of higher interest rates, shows how quickly popular trades can unwind once sentiment shifts. That risk could spillover into Korea once local markets open.
“We’ve been trimming gross exposure at the margin and layering derivative protection over the last few weeks,” said Yi Ling Ong, managing partner at Golden Horse Fund. Several large IPOs, including a SpaceX listing this month, could lead to rotation as funds raise cash to participate, making it “prudent to hold some dry powder,” she said.
Over the past year, Korean stocks captured global attention as a combination of the AI boom and the government’s successful corporate reform propelled the index to new highs. Strong earnings potential continues to underpin bullish sentiment, but the extended rally has led to crowding in a few major players, leaving the market vulnerable to abrupt reversals. The benchmark tumbled 7 per cent at one point on Friday.
The caution is showing up in the derivatives market.
“The debate isn’t whether the Kospi story remains attractive — it’s how to stay invested without giving back a portion of the gains,” said Tanvir Sandhu, global chief derivatives strategist at Bloomberg Intelligence. Options activity in the EWY ETF suggests investors are becoming more cautious, with demand shifting from upside exposure to downside protection, he said.
Some investors are looking for opportunities beyond Samsung Electronics and SK Hynix, whose meteoric rise propelled them into the $1 trillion valuation club and helped Korea briefly overtake India as the world’s sixth-largest stock market.
“The alpha lies lower down the value chain — in the picks-and-shovels of the picks-and-shovels,” said Vikas Pershad, portfolio manager at M&G, referring to companies that benefit from spending on AI infrastructure without being at the heart of the trade.
 "World's hottest market has Korea bulls turning cautious after rally 2")
Not Bearish
To be sure, the rotation doesn’t signal investors turning bearish on Korea. Valuations remain cheaper than in rival tech hub Taiwan and investors say the market still offers one of the strongest AI-linked stories in global equities.
At 8.6 times forward earnings, the Kospi trades below its five-year average of 10 times and is much cheaper than Taiwan’s benchmark, which trades at about 20 times, data compiled by Bloomberg show.
Earnings upgrade cycle has also started to broaden. Excluding Samsung and SK Hynix, the rest of the Kospi is now expected to deliver more than 50 per cent profit growth this year, up from just 20 per cent in January, according to Golden Horse Fund.
“The speed of the rally has been vertiginous but in this type of market I would rather let the rally continue,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA. “Exiting now will make it very difficult to re-invest later if the market doesn’t correct.”
Still, foreign outflows have become a concern. Global funds have pulled a record $76 billion this year, selling in every session over the past month. While part of the retreat is due to technical limits on single-stock holding, the selling has been absorbed by more fickle retail investors — a dynamic that may heighten volatility.
At the same time, some investors are growing wary of rising retail leverage. The concern is that popularity of leveraged ETFs and the planned weekly single-stock options could amplify swings in an already-volatile market.
While the products are “really interesting” and show retail participation is growing, they also leave the market “in somewhat of a precarious position in case of a reversal,” Stephane Martin, head of derivatives institutional sales for Asia at Optiver, said at a panel discussion at Bloomberg’s Volatility Forum last week.
