Explained: How AI-led Kospi, Nikkei selloff sparked record 15% drawdown in Asian funds in July

Some of Asia's largest multi-strategy funds suffered their steepest drawdowns of the year in July as a sharp selloff in artificial intelligence-linked stocks across Japan, South Korea and China wiped out a sizable portion of the gains accumulated in the first half of 2026.

The same positions that had powered returns earlier this year became a drag in July, as rising concerns over AI spending and the Middle East conflict triggered a broad selloff in semiconductor stocks, hitting some of Asia's biggest chipmakers.

According to a Reuters report, some of the region's largest multi-strategy platforms posted monthly losses of 3% to 9%, while Goldman Sachs estimated that Asia's primary stock-picking hedge funds fell 15.2% in July, marking their steepest monthly decline on record.


Among individual funds, Hong Kong-based Polymer Capital Management, one of the best-performing Asia-focused multi-strategy funds in the first half, lost 6.9% in July, trimming its year-to-date gain to 11.5%, Reuters report added. The fund manages more than $6 billion in assets.

Also read: South Korea’s Kospi tumbles 5% after 2-day rally, angry retail investors vow not to invest again

It was a rough month for AI-focused markets as South Korea's benchmark Kospi Index tumbled 22% in July, while Japan's Nikkei 225 fell 8%.

What’s troubling investors?

At the heart of the selloff is overheating. AI and semiconductor stocks, the undisputed market darlings of 2025 and 2026, have suddenly come under pressure as concerns grow that the rally may have run ahead of fundamentals.

Fresh concerns over the scale of artificial intelligence spending have added to the pressure on semiconductor stock. Investors are increasingly questioning whether companies investing billions of dollars in artificial intelligence will generate sufficient returns to justify the spending.

More to come?

Goldman Sachs, however, struck a more constructive note. The brokerage said the recent selloff in South Korean semiconductor stocks had been amplified by the unwinding of positions in newly launched exchange-traded funds that are heavily concentrated in one or two stocks. It added that the underlying semiconductor cycle remains fundamentally strong.

Last month, SK Hynix Chief Executive Kwak Noh-jung expected the global memory industry to face its worst-ever supply shortage in 2027. He said demand is likely to remain above the company's production capacity well beyond 2030 despite aggressive expansion plans.

South Korea's semiconductor industry continues to enjoy strong long-term demand, but elevated leverage has made the market more vulnerable to sharp corrections. Bloomberg quoted Hebe Chen, senior market analyst at Vantage Global Prime in Sydney, as saying that the country's semiconductor story is supported by genuine structural demand, but excessive leverage has turned it into a more fragile market trade.

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"The double-edged sword is now cutting the other way and leverage is making the fall every bit as powerful as the climb," Chen said.

South Korea's government has meanwhile stepped up efforts to cushion the impact of the market slump. The authorities are reviewing market stabilisation measures, including possible changes to regulations governing single-stock leveraged ETFs.

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