One week / one topic: Seoul survivors

What happened?

Korean equities remain the epicenter of the AI earthquake, with four double-digit percentage moves over the last two weeks.

As they say, this is not for beginners.

The local Kospi 200 index ended July down 24% with SK Hynix and Samsung – the very stocks that had made it the world's best-performing market earlier in the year – doing most of the damage.

After the index tripped its circuit breaker for two consecutive days, many investors suspected that there was a (large) forced liquidation behind such a dramatic change in fortunes.

Surprise, surprise – it was indeed the case.

Situational Awareness – until recently a wildly successful AI-focused hedge fund – had been allegedly running 4x leverage and was quickly forced to dump billions of its listed tech investments to meet margin calls.

Just six days after the hedge fund had reported a 439% net return for the first half of the year – with a postscript suggesting that it was a good time to add funds – Citadel swooped in to buy the bulk of its public book (a stake once estimated at $16bn) at a ~10% discount.

For all the sound and fury, though, Korean equities remain on a stellar run – having more than tripled over the last 16 months.

True to form, we stepped into the dislocation and increased our position in Korean equities amidst the wreckage.

Where next from here?

Our observations

• Fundamentals: Despite plausible concerns about an AI-induced earnings bubble, Korean equities remain very cheap even after their historic run since April 2025.

  You don’t know what you don’t know here, but current valuations make for a plausible ‘margin of safety’ reassurance angle.

• Price action: The hedge fund’s 439% performance in six months was a warning, not a triumph.

  Mathematics and the Kelly criterion set a limit to how quickly returns can compound, no matter the vibes… Sorry-not-sorry.

• Investor beliefs: Unsurprisingly – once prices started to fall – the narrative around ‘oh, memory stocks are fragile and cyclical’ quickly resurfaced to undermine confidence in Korean equities’ prospects.

  Maybe, possibly…? However, such a quick turn in sentiment can’t possibly be the sign of a well-considered repricing… And so, we leaned towards taking the other side of the trade.

So what?

This was a textbook Episode, the type of dislocation that we aim to take advantage of in our portfolios.

Prices were driven down very quickly by forced flows and emotion, rather than a change in the underlying value.

As the sell-off was peaking – two circuit breakers in a week, plus the heaviest global-tech long liquidation since early 2021 – we ran a pre-planned scale-in into the weakness, also comforted by forward earnings multiples that had compressed to multi-decade lows.

Nobody can call the exact bottom, and there might well be other leveraged players needing to liquidate leveraged positions in Korean stocks. (Volatility has somewhat abated, but it remains high)

Nonetheless, markets don’t pay you for knowing the future – but they do tend to offer rewards if you have remained solvent and disciplined once the storm arrives.

Citadel itself learned this lesson the hard way, when two of its largest funds lost roughly half of their value in 2008.

Along these lines, the late, great Charlie Munger encouraged us all to learn from other people’s mistakes – it’s cheaper.

Let’s hope then that we have paid enough tuition over time to reap some benefits now.

Mood music: Bruce Springsteen – The Rising

By popular demand, here is the One week / One topic playlist

The information provided should not be considered a recommendation to purchase or sell any particular security.