Bae Jae-kyu, CEO of Korea Investment & Trust Management, urged investors on the 20th to stop investing in single-stock leveraged ETFs, citing structural losses during volatility. Will Rhind, CEO of GraniteShares, countered the same day that excessive liquidity restrictions could amplify volatility. The debate follows Korean authorities raising the minimum deposit from 10 million to 30 million won and halting new listings.
Bae Jae-kyu Warns Against Single-Stock Leveraged ETFs Citing Performance Data
Bae Jae-kyu posted on Facebook on the 20th titled "Performance Analysis of Individual Stock Leverage Inverse 2x Products," stating "I apologize for saying this as the CEO of an asset management company operating individual stock leveraged ETFs. The conclusion is not to invest in individual stock leverage and inverse 2x ETFs." Korea Investment & Trust Management operates ACE Samsung Electronics Single Stock Leverage and ACE SK Hynix Single Stock Leverage products.
Bae explained that "even if the original stock price returns to its starting point over time, the ETF price is unlikely to return to its original level," adding "especially when volatility is high like now, the structure causes daily losses to accumulate."
According to data Bae attached, SK Hynix stock fell 17.9% from 2.243 million won on May 27 to 1.842 million won on the 16th. During the same period, the largest SK Hynix single-stock leveraged product by trading volume and assets under management recorded a loss of 47.5%. The theoretical loss applying double the stock decline would be 35.8%, but actual losses exceeded this by 11.7 percentage points.
The SK Hynix inverse 2x product also lost 31.1%, despite the stock falling 17.9%, which theoretically should have generated a 35.8% gain. The gap between general investors' expected returns and actual performance reached 66.9 percentage points. This phenomenon stems from the structure of leveraged and inverse products, which reset returns daily to match target multiples based on daily returns.
Will Rhind Argues Liquidity Restrictions May Increase Volatility
Will Rhind told the publication in a video interview on the 20th that "excessively restricting liquidity in single-stock leveraged products could actually increase volatility." GraniteShares was the first company to launch a single-stock leveraged product based on SK Hynix ADR (American Depositary Receipt) as the underlying asset in the United States.
Rhind criticized Korean financial authorities' recent single-stock leverage regulations as excessive intervention. He stated, "If you significantly raise the basic deposit, investors who could previously buy leveraged products will no longer be able to purchase them, and some may have to reduce existing holdings. When the number of investors who can newly buy decreases and only those who can sell increase, the market's buy-sell balance breaks, which could actually expand volatility more significantly." He argued that measures intended to reduce volatility might instead reduce liquidity, increase downward pressure, and potentially expand volatility.
Rhind also questioned whether restricting trading and reducing market liquidity is appropriate "now that global investors' attention is focused, when a year ago not many overseas investors felt the need to buy Korean stocks."
Regarding the semiconductor stock peak-out debate, Rhind stated, "Major memory companies' inventories are sold out at least until mid-next year," adding "Since the memory supply-demand imbalance is unlikely to be resolved in the short term, there is no significant need to worry about memory peak-out at this point."
FAQ
What did Bae Jae-kyu say about single-stock leveraged ETFs on the 20th?
Bae Jae-kyu, CEO of Korea Investment & Trust Management, posted on Facebook on the 20th urging investors to stop investing in single-stock leveraged and inverse 2x ETFs, explaining that these products have a structure where daily losses accumulate during high volatility, and even if the original stock price returns to its starting point, the ETF price is unlikely to return to its original level.
How did SK Hynix leveraged products perform compared to the stock price?
SK Hynix stock fell 17.9% from 2.243 million won on May 27 to 1.842 million won on the 16th. The largest SK Hynix leveraged product lost 47.5%, exceeding the theoretical 35.8% loss by 11.7 percentage points. The inverse 2x product lost 31.1% instead of gaining 35.8%, creating a 66.9 percentage point gap from expected returns.
Why does Will Rhind oppose Korean regulations on single-stock leveraged products?
Will Rhind, CEO of GraniteShares, stated in a video interview on the 20th that raising the minimum deposit from 10 million to 30 million won could break the market's buy-sell balance by reducing investors who can buy while increasing those who can only sell, potentially expanding volatility rather than reducing it, which contradicts the regulatory intent.
