Global investment banks are moving one after another to restrict hedge funds' leveraged investments in Samsung Electronics (005930.KS) and SK hynix (000660.KS), both of which have surged this year. While expectations for an artificial intelligence (AI) chip supercycle remain intact, the move is seen as risk management as investment capital has flowed excessively into specific stocks.
According to Bloomberg Tuesday, major investment banks including Citigroup, JPMorgan Chase and Goldman Sachs have raised the financing costs applied when hedge funds use swaps to invest in Samsung Electronics and SK hynix. They have reportedly reduced the size of new transactions and tightened counterparty standards.
Some banks are shifting to a case-by-case review for new swap trades or rejecting the transactions altogether. Morgan Stanley has been turning away some clients seeking new swap trades related to Samsung Electronics and SK hynix, and some small and mid-sized banks have also halted accepting additional orders over the past two weeks, according to reports.
These measures are not limited to Korean chip stocks. Similar risk management measures are reportedly being applied to TSMC, the world's largest foundry company. The market interprets this as a signal that global investment banks are reviewing their exposure to Asian AI chip stocks as a whole.
A swap is a representative over-the-counter derivative that allows investors to bet on specific stocks using leverage without actually holding the shares. It is considered a main vehicle used by foreign hedge funds when investing in the Korean stock market.
Behind Wall Street's heightened caution is the AI chip rally that has continued this year. Samsung Electronics and SK hynix have maintained a steep upward trend, driven by expanded AI server investment and growing demand for high-bandwidth memory (HBM). On Tuesday, Samsung Electronics closed at the 320,000 won range, up 7.8% from the previous trading session, while SK hynix ended at 2.15 million won, up more than 2%.
Still, the investment banks judge that the size of leveraged trades has grown excessively, apart from the possibility of further stock gains. Banks that execute swap trades must either pass the opposite position to other investors or hedge it themselves, but in a bull market like the current one, demand to bet on falling stock prices is limited. As a result, the explanation goes, there are increasing cases of banks taking on risk directly using their own balance sheets.
On top of this, the capital burden on investment banks is growing as SpaceX's $75 billion initial public offering (IPO), the largest ever, proceeds. Some in the market also argue that banks are preemptively reducing their chip stock exposure ahead of the mega IPO.
