--- title: "\"AI Stock God\" Blowout and \"Epic South Korean Stock Market Crash\" – Seemingly \"Accidental\" but Actually \"Inevitable\": A Rehearsal for the Future" type: "News" locale: "en" url: "https://longbridge.com/en/news/294755633.md" description: "The market quickly digested the blowout of the \"AI Stock God\" and the plunge in South Korean stocks, returning to calm after brief volatility. However, Deutsche Bank believes these two events were not isolated incidents, but a concentrated manifestation of systemic leverage accumulated over more than a decade of low interest rates. As interest rates normalize, traditional safe-haven assets lose effectiveness, and the Federal Reserve actively introduces uncertainty, \"small volatility\" events will occur with higher frequency, and each could become a trigger for a larger crisis" datetime: "2026-08-04T01:41:25.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/294755633.md) - [en](https://longbridge.com/en/news/294755633.md) - [zh-HK](https://longbridge.com/zh-HK/news/294755633.md) --- # "AI Stock God" Blowout and "Epic South Korean Stock Market Crash" – Seemingly "Accidental" but Actually "Inevitable": A Rehearsal for the Future Last week, Situational Awareness, the hedge fund managed by the "AI Stock God," was forced to liquidate $16 billion in stock positions after its highly leveraged bets on AI companies failed. During the same period, the South Korean KOSPI index plummeted by over 20% within 48 hours, only to rebound 25% from its lows, closing the week essentially flat. The market viewed these two events as incidental "noise," quickly digesting and moving past them. After brief turbulence, the market ultimately returned to calm. However, this consensus to "look forward" may be a dangerous misreading. While neither the blowout of the "AI Stock God" fund nor the plunge in South Korean stocks triggered a systemic market collapse, Deutsche Bank argues that both are symptoms of the same underlying issue: leverage accumulated during the era of low interest rates. They should not be viewed as isolated events. According to Zhuifeng Trading Desk, analysts including Luke Templeman at Deutsche Bank Research wrote in a report on August 3: > **We believe this interpretation is wrong, or at least incomplete. Both events are symptoms of the same underlying condition: leverage—leverage present in ETFs, margin accounts, and hedge fund books—which was fostered by more than a decade of low and stable interest rates.** ## "Flat Performance" Is the Most Dangerous Illusion The KOSPI completed a full "V-shape" recovery within a week, with the index level showing almost no net change. However, the Deutsche Bank report points out that this figure is severely misleading. > An index fluctuating by 45 percentage points back and forth over a few days is economically very different from it remaining stationary. The reason lies in the mechanics of leveraged positions: during declines, leveraged and margin positions are often mechanically and irreversibly subject to compulsory liquidation, regardless of any subsequent rebound. While gains and losses at the index level may have offset each other, the wealth losses suffered by individual investors—especially retail investors using leverage for the first time—cannot be "repaired" by the rebound. Retail investors who have been blown out are not coming back. Reports indicate that over 3% of South Korean adults received margin calls within the last two weeks. The report states, "If true, this figure is deeply concerning." This is not just index volatility; it is real household wealth destruction. ## Leveraged ETFs: South Korea Today, US and Europe Tomorrow? A specific trigger mechanism for this crash in South Korea was the official launch in April of single-stock leveraged ETFs tracking Samsung Electronics and SK Hynix. These two underlying stocks were already mega-cap companies with market capitalizations exceeding $1 trillion, with retail investors holding a significant proportion. After the launch of the leveraged ETFs, retail investors' leveraged exposure to these two stocks expanded dramatically almost overnight. When the underlying stocks fell, the amplification effect of the leveraged products triggered a chain reaction of liquidations. Analysts warn that this is not a story unique to South Korea. "Similar products are growing rapidly in the United States and Europe as well." If a similar event were to occur in the United States, the transmission path would be far more destructive than the liquidation of a single hedge fund—it would penetrate consumer spending (as households facing margin calls cut back on expenditures), credit markets (as brokers and lenders reassess collateral), and market confidence (as retail participation reverses). Deutsche Bank draws an analogy between the South Korean event and another case: the collapse of Silicon Valley Bank (SVB). While seemingly an isolated incident, it effectively forced policymakers to guarantee deposits for nearly the entire US banking system—an intervention scale far exceeding the magnitude of the initial problem. > **The lesson is not that every small event will evolve into a systemic one, but that those which do evolve are rarely obvious beforehand.** ## Same Root Cause: Leverage Accumulated Over a Decade of Low Interest Rates The blowout of the "AI Stock God" fund and the flash crash of the KOSPI appear unrelated. However, Deutsche Bank believes they are different symptoms of the same disease: **more than ten years of low and stable interest rates systematically encouraged the accumulation of leverage in ETFs, margin accounts, and hedge fund books.** It is like the foundation of a building slowly settling over many years—unnoticeable on the surface until a trigger point causes cracks to appear. Analysts also observed that market and policy attention has long been focused on sovereign debt risk, while the risk of household leverage has been systematically underestimated. Although the growth rate of household leverage has plateaued, its absolute level remains high. > When we show the chart below, clients' eyes fall on the rise in sovereign debt, not the plateau in household leverage. This "focus shift" is precisely why the risk of household leverage is currently being systematically underestimated. ## Frequent "Small Volatility" Events Are No Coincidence Deutsche Bank's data shows that the frequency of VIX spikes since 2022 is significantly higher than the average of the past decade. Analysts directly link this phenomenon to the normalization of monetary policy interest rates by global central banks: **In the era of low interest rates, market volatility was suppressed, leading to leverage accumulation; as interest rates return to normal, the forces suppressing volatility disappear, and the accumulated leverage begins to seek an exit.** Since interest rate normalization began in 2022, the frequency of "small volatility" events in the VIX has been significantly higher than in the previous decade. Meanwhile, traditional safe-haven assets—gold, the US dollar, the Swiss franc, the Japanese yen, US Treasuries, and German Bunds—have failed to effectively hedge risk during multiple shocks since 2020, including the pandemic, the 2022 rate hikes, the 2025 tariff shock, and the 2026 Iran war. Analysts wrote: **"If safe-haven assets continue to fail when needed most, the buffer layer that investors implicitly rely on is much thinner than before. This increases the probability that future 'small volatility' events will evolve into larger problems."** Deutsche Bank also proposed a noteworthy explanatory framework: Is the Federal Reserve "intentionally" introducing volatility? Citing analyst Rob Armstrong, the report points out that **Federal Reserve Chair Walsh's withdrawal of forward guidance may not have been a mistake, but a deliberate policy choice—aimed at reintroducing an "uncertainty premium" to the market to curb excessive leverage.** > His withdrawal of forward guidance was a deliberate attempt to reintroduce an 'uncertainty premium' to the market—because lower volatility had allowed the market to accumulate leverage beyond normal levels. **Forward guidance suppressed daily volatility, while stable prices and calm markets encouraged government and market participants to borrow beyond normal levels.** Walsh could not publicly state this logic, as it would trigger market panic, so he expressed it in more ambiguous "referee" language—but in Armstrong's view, the policy actions point in the same direction. Analysts wrote: If policymakers truly believe that more daily volatility is healthy, investors should expect more events like the "Situational Awareness blowout" and the "KOSPI plunge," and stop treating each as an isolated, contained accidental event. ## Where Do Backlogged Risks Remain? At the end of the report, Deutsche Bank listed two areas where implicit backlogged risks still exist: **Private Equity:** A large number of technology, media, and telecommunications (TMT) targets acquired during the near-zero interest rate era remain on PE firms' books, with holding periods far exceeding expectations due to closed exit markets. "The moment of reckoning may still lie ahead." **Listed Companies:** Many listed companies still carry inefficient assets acquired during the previous debt-driven M&A boom, resulting in low asset turnover rates—a legacy trace of cheap financing encouraging "revenue-over-profit" expansion. Analysts wrote: "The market's instinct is to categorize the Situational Awareness fund collapse and KOSPI volatility as 'noise,' because neither has yet evolved into a systemic event. 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