South Korea's stock market revival, fueled by renewed strength in memory chip demand and a fresh wave of foreign buying, has drawn a stark warning from the Bank of Korea about the destabilizing potential of overseas leverage.

The central bank on Thursday issued a report voicing concern that hedging strategies involving offshore hedge funds, leveraged ETFs, and total return swaps conducted by global banks and asset managers are increasingly influencing Seoul's cash equity market.

A key worry for the Bank of Korea is that when global investment flows become too concentrated in heavyweight names like Samsung Electronics and SK Hynix, leveraged positioning and subsequent forced unwinds could amplify swings in the broader index. As such, the central bank believes a scenario where fundamental earnings growth in the memory chip sector coexists with extreme long-term market volatility is plausible.

The Korean market has rebounded decisively since its July trough, re-entering technical bull territory with a gain exceeding 20% from the low. In a notable session on September 7, the KOSPI index surged 4.6% while foreign investors recorded net purchases of 1,291 billion won, as Samsung Electronics jumped 5.7% and SK Hynix climbed 8.1%, mirroring strength in US and Korean memory stocks.

Following further gains on September 8 and 9, the index reached 7,129.34 points, marking a cumulative rebound of roughly 27.5% from the July 30 low of around 5,593 points. During this stretch, Samsung and SK Hynix added another 2.59% and 3.98%, respectively. While these two memory leaders continue to steer the index recovery, the technical bull market signals a significant advance from the bottom rather than a full recovery; the index still sits well below its record high of 9,385 points set in June.

The AI Boom Fuels a Memory Chip Surge

Wall Street investment bank Bernstein recently highlighted that while the semiconductor industry has seen a seasonal dip, demand for AI infrastructure-related chips—especially next-generation HBM systems and server-grade DRAM/NAND for data centers—remains exceptionally strong in terms of both pricing and demand.

Bernstein noted that although July is typically a slow month for semiconductor sales, year-on-year growth reached 131.4%. Global memory chip sales surged 451.7% year-on-year in July. Excluding memory, the broader semiconductor industry grew approximately 35% year-on-year. The deeper shift is that memory is now becoming the primary driver of semiconductor revenue growth.

According to Bernstein's report, global semiconductor sales for the first seven months of this year reached approximately $861 billion, up about 111% from $408 billion in the same period last year. Memory contributed an additional $355 billion in sales. Of that, roughly $306 billion came from pricing and product mix changes, accounting for approximately 68% of the industry's overall sales growth.

Goldman Sachs, another financial giant, believes memory chips are emerging from their summer consolidation, and the scope for reallocation after deleveraging is substantial. Following July's AI-driven deleveraging storm and the sharp selloff in global memory stocks caused by extreme bullish positioning, and after a summer of sideways trading, memory chip shares and investment targets tied to AI data center construction are now breaking out of their recent downtrend, setting the stage for a new bull run.

Goldman's data shows that total and net leverage for US fundamental long/short hedge funds are at the 27th and 4th percentiles over the past year, respectively. The semiconductor implied volatility indicator has dropped from around 65 in July to 36, indicating that fund risk exposure remains low and the market's pricing for sharp fluctuations has converged. Goldman also pointed out that key memory chip stocks like Micron and SanDisk are breaking above consolidation ranges, offering technical signals for capital to reposition.

Adding to the bullish case, UBS analyst Timothy Arcuri predicted in a September 8 report that average selling prices for memory chips in the third quarter would rise over 20% quarter-on-quarter from the record-high base of Q2. He also expects the supply-demand mismatch for DRAM and NAND—where supply falls short of strong AI-driven demand—to persist at least through 2027.

Improving positioning and technicals, combined with companies accelerating AI agent and reasoning tool deployment, underscore the logic that surging AI compute demand is driving sustained growth in memory chip requirements.

Central Bank Warns of Derivative Risks Tied to Korean Chipmakers

Undeniably, memory chip stocks are forming a new bullish trajectory characterized by rising prices supporting earnings and low positioning providing ample room for accumulation. However, the Bank of Korea cautions that high-leverage and high-frequency hedging transactions initiated from overseas could trigger another sharp downturn.

The central bank is calling for enhanced monitoring of offshore derivatives linked to Korean chipmakers, warning that rapid growth in these products could continuously and persistently amplify domestic stock market volatility. It cited the leveraged bets of hedge fund Situational Awareness as one factor in recent market fluctuations.

In its semi-annual monetary policy report to parliament on Thursday, the Bank of Korea stated that the Korean market's high concentration in memory semiconductor stocks, combined with foreign investors rebalancing portfolios from highly leveraged positions and the accumulation and unwinding of domestic leverage, drove unprecedented volatility in the KOSPI between January and July. The report noted that offshore hedge funds built large leveraged positions in Korean chip stocks and then unwound them during the violent selloff in July, further exacerbating market swings.

The central bank cited the US-based AI-focused fund Situational Awareness, run by Leopold Aschenbrenner, known as an "AI prophet" and the youngest hedge fund manager, as an example. Citing foreign media reports, the Bank of Korea said the prominent fund used leverage of up to 4x when building and unwinding positions in global memory chip companies.

It was after this "AI prophet" faltered that some Wall Street analysts concluded the deleveraging process in global AI tech stocks was largely complete, supported by short covering, institutional and retail dip-buying, and a robust fundamental outlook for AI compute demand.

In July, semiconductor stocks linked to AI infrastructure faced a severe selloff that pushed both the Korean market and the Philadelphia Semiconductor Index into bear market territory. Amid the collapse of highly leveraged AI bets, Situational Awareness suffered a record 67% loss, forcing the fund to sell most of its public market positions to Citadel, run by billionaire Ken Griffin, and fully deleverage.

The Bank of Korea's warning coincides with a surge in demand for offshore high-leverage ETFs linked to Korean memory chip makers and overseas ETFs heavily concentrated in SK Hynix and Samsung. One Korea-focused ETF listed by BlackRock in the US, with about a quarter of its portfolio in SK Hynix, attracted a record $2.8 billion in a single week in July.

The central bank stated that growth in such products is creating additional channels for offshore capital flows to influence the domestic market. It also highlighted that leveraged ETFs listed in Hong Kong that actively track Samsung Electronics and SK Hynix saw their market capitalization surge more than 20-fold in the first half of the year.

The Bank of Korea added that international hedge funds and asset managers, engaging in highly leveraged total return swaps with ETF providers and subsequently trading Korean stocks, futures, and options to hedge, appear to be amplifying domestic price swings. While the central bank did not cite specific cases, an unusual trade involving SK Hynix shares in July triggered a forced liquidation of nearly $60 million in an offshore crypto market, highlighting the rising cross-market risks posed by leveraged products tied to Korean chipmakers.