Samsung and SK Hynix Surge Triggers Risk Control, Global Funds Face Forced Reductions

Samsung Electronics and SK Hynix's continuous surge has brought rebalancing pressure on some international funds, with the large holding scales triggering mandatory sales on the regulatory level.

According to the compliance red line that a single stock holding usually should not exceed 10% of total assets, institutions such as GAM Investment Management and Jupiter Asset Management have been forced to reduce their holdings in these two South Korean chipmakers. This mechanical rebalancing has not only exacerbated market volatility but also demonstrated the over-crowded trading in the artificial intelligence track.

Goldman Sachs Group estimates that since the end of October last year, diversified investment rules have cumulatively triggered about $69 billion in forced sales in South Korean equity funds. As of Thursday this week, global investors have sold net $63.6 billion worth of South Korean domestic stocks this month, setting a new record since 1999, with a combined outflow of $58.6 billion for Samsung and SK Hynix this year. Over the past year, SK Hynix has increased by more than 1000%, and Samsung has risen by more than 400%.

Amundi SA's Florian Neto pointed out that the rapid increase in individual stocks has led to overweighting, and investors are forced to cash out for diversified allocation. Christian Heck from First Eagle Investments added that the sell-off is purely driven by risk control rules and does not represent a deterioration in the outlook for the companies. In addition, South Korean domestic mutual funds are exempt from the 10% single-stock limit, with current holding limits for Samsung and SK Hynix reaching up to 27.05% and 15.71%, respectively.

Faced with direct shareholding restrictions, funds are flowing towards associated companies that hold substantial shares in both giants. Over the past year, SK Square, which holds 20.5% of SK Hynix's shares, has increased by more than 1000%, and Samsung Life Insurance, which holds 8.58% of Samsung Electronics' shares, has also seen a price increase of more than three times.