Foreign selling in Korea and gross de-risking by Asian hedge funds intensified, but inflows into India, southbound flows, and global funds provided offsets

Overview

The report tracks changes in fund flows and positioning among foreign investors, domestic institutions, retail investors, Stock Connect, mutual funds, and hedge funds across global and emerging markets. In the latest week, Emerging Asia ex-China continued to see net foreign selling, led by Korea, while India maintained inflows. In July, Asian hedge funds experienced record drawdowns and gross de-risking, while the scale of leveraged trading in Korea declined significantly from its peak. At the same time, southbound flows, Asian retail flows, and global equity funds still maintained net inflows, indicating that risk appetite has not deteriorated across the board but instead shows clear divergence across investor types and regions.

Core views

First, Korea is currently the weakest major Asian market in terms of fund flows, ranking among the highest in both weekly and year-to-date foreign selling, though local retail buying and the clearing of leveraged positions may buffer some pressure. Second, India's weekly foreign inflows and strong domestic institutional buying show outstanding local capital absorption capacity, though foreign investors remain net sellers year to date. Third, Asian hedge funds reduced risk rapidly in July, and the Asia net allocation in the GS Prime book fell noticeably, though it remains overweight relative to MSCI AC World. Fourth, southbound funds continue to flow into Hong Kong-listed technology hardware and internet assets, creating an investor-structure divergence versus hedge funds reducing China allocations. Fifth, global equity funds still have meaningful net inflows, but they slowed versus the prior week, and emerging market additions are mainly driven by passive flows, so the quality of flows requires continued monitoring.

Analysis framework

The report integrates data from exchanges, Stock Connect, EPFR, GS Prime, Bloomberg, FactSet, MSCI, and local industry associations, decomposing funding sources by foreign investors, domestic institutions, retail investors, mutual funds, and hedge funds, and combines weekly flows, year-to-date cumulative values, historical percentiles, z-scores, and leverage indicators to assess regional risk appetite and positioning crowding.

Methodology notes

• Fund flow analysisMulti-channel investor fund flow decomposition

  Separately observe flows from foreign investors, domestic institutions, retail investors, Stock Connect, and mutual funds.

  Different investor groups may send opposite signals. Decomposition helps identify whether market pressure comes from cross-border capital, institutional redemptions, or local investor behavior, avoiding interpreting a single flow indicator as the direction of the overall market.

• Positioning analysisGS Prime hedge fund positioning and gross de-risking monitoring

  Use net allocation, gross allocation, overweight versus benchmark, historical percentiles, and trading-flow z-scores to measure risk-taking.

  Net allocation reflects directional risk, while gross allocation reflects overall leverage and trading activity; simultaneous declines in both typically indicate active de-risking by funds, while overweight versus MSCI AC World is used to assess whether Asia positioning remains crowded.

• Leverage risk analysisKorean leveraged ETF and margin trading monitoring

  Assess retail leverage pressure through leveraged ETF AUM, its share of the ETF market, margin financing balances, and margin call indicators.

  The decline in leveraged ETF AUM and margin financing balances from their peaks implies that crowded positions are being cleared; margin calls as a share of receivables have fallen to 1%, indicating recent volatility has not yet evolved into broad forced liquidation pressure from margin financing.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Korean equities

  Short-term fund flows are weak, but the clearing of leveraged positions improves the medium-term shareholding structure

  Strengths

  Local retail investors net bought US$5.5bn in one week, leveraged ETF AUM and margin financing balances have declined significantly, and margin call pressure is moderate.

  Weaknesses

  Foreign investors net sold US$5.0bn in one week and US$105.8bn year to date, while hedge fund net allocation to Korea fell by 234 basis points.

  Comparison

  Foreign outflows are significantly weaker than in India, Japan, and most non-Asia emerging markets.

  Risks

  If foreign investors continue to withdraw or the market falls again, local retail absorption capacity may decline and leverage-related volatility may be triggered again.

• Indian equities

  A relative funding safe haven within the region

  Strengths

  Foreign investors recorded weekly net inflows of US$1.2bn, and domestic institutions have cumulatively bought US$55bn in 2026, the highest among Asian markets.

  Weaknesses

  Foreign investors are still net sellers year to date at US$25.3bn, and the weekly improvement is not yet enough to confirm a long-term trend reversal.

  Comparison

  Compared with Korea and Taiwan, China, India has shown stronger recent marginal performance in cross-border flows, and local institutional absorption is also more prominent.

  Risks

  If foreign inflows do not continue, the market will remain relatively dependent on domestic institutional capital.

• China and Hong Kong equities

  Southbound flows provide support, but hedge fund allocations are declining

  Strengths

  Southbound flows recorded weekly net inflows of US$1.3bn and year-to-date cumulative inflows of US$47.8bn, with technology hardware and internet as the main destinations.

  Weaknesses

  Hedge fund net allocation to China fell by 198 basis points to 6.0%, the lowest level in five years, with relatively notable net selling in July.

  Comparison

  The positive behavior of local southbound funds contrasts sharply with global hedge funds reducing China risk exposure.

  Risks

  If southbound flows slow, institutional de-risking may dominate the market again; some stocks with high position concentration also face crowded-trade risk.

• GEM and Asia ex-Japan equity funds

  Fund subscriptions remain positive, but are mainly driven by passive flows

  Strengths

  GEM and Asia ex-Japan funds recorded weekly net inflows of around US$4.0bn and US$4.5bn, respectively.

  Weaknesses

  Asia ex-Japan active funds still had net outflows, while passive flows dominated incremental flows.

  Comparison

  Fund subscription signals are stronger than direct foreign trading flows, but active capital is more cautious.

  Risks

  Passive subscriptions may reverse quickly with index fund allocation changes and cannot fully offset active selling by hedge funds and foreign investors.

• Non-Asia emerging market equities

  Overall marginal inflows, outperforming emerging Asian markets

  Strengths

  Foreign investors net bought about US$90mn in one week, with cumulative net inflows of US$9.5bn in 2026; Brazil recorded cumulative net inflows of US$6.7bn.

  Weaknesses

  Weekly inflows are small, and differences among countries are large.

  Comparison

  Recent flows in Latin America and Europe, the Middle East and Africa have been better than Emerging Asia ex-China.

  Risks

  Changes in commodities, the U.S. dollar, interest rates, and regional politics may quickly reverse current inflows.

Key data

• Weekly foreign flows in Emerging Asia ex-China-US$3.8bnKorea recorded net outflows of US$5.0bn, while India recorded net inflows of US$1.2bn.
• Korea year-to-date foreign flows-US$105.8bnThe most significant source of foreign selling among markets covered in the report.
• July performance of Asian fundamental long/short hedge funds-15.2%The largest monthly drawdown on record, mainly driven by long-side losses.
• Monthly gross de-risking intensity in Asian equitiesFive-year z-score of -1.9The largest monthly gross de-risking in the report's records, with net selling mainly concentrated in China, Korea, Taiwan, China, and Japan.
• GS Prime Asia net allocation29.0%Down 6.6%, but still overweight MSCI AC World by 11.9%.
• Korean leveraged ETF AUMUS$14bnDown about 60% from the US$34bn peak, accounting for around 4% of Korea ETF market AUM.
• Korean margin financing balance20tn KRWThe peak was 38tn KRW; adjusted by market capitalization, it is about 0.5%.
• Weekly southbound flows+US$1.3bnYear-to-date cumulative inflows of US$47.8bn, mainly into technology hardware and internet sectors.
• Weekly global equity fund flows+US$33bnBelow the prior week's US$64bn; U.S., Japan, and GEM funds all recorded net inflows.
• Year-to-date Asian retail flows+US$75bnIn the latest week, Korean retail investors net bought US$5.5bn, while Taiwan, China retail investors net sold US$2.4bn.

Impact & implications

Fund flows indicate that Asian markets are in a phase where institutional de-risking and local capital absorption coexist. In the short term, Korea and highly crowded Asian long assets may remain affected by foreign selling and hedge fund deleveraging; however, the sharp decline in leveraged ETF AUM and margin financing balances means the forced deleveraging risk in the Korean market has fallen from its peak. India shows relative resilience thanks to marginal foreign capital returning and strong domestic institutional buying. The Hong Kong market is supported by southbound flows, and technology hardware and internet sectors may benefit relatively, but the decline in China-related hedge fund allocations still limits overall risk appetite. Global fund inflows help stabilize valuations, but inflows have slowed from the prior week and passive funds make a relatively high contribution, so it is not appropriate to conclude from this that the trend in active Asia flows has already reversed.

Risks

• Weekly fund flows are volatile, and single-week data cannot be used alone to confirm medium- to long-term trends.
• Asian hedge funds remain significantly overweight relative to global benchmarks, and further gross de-risking may bring continued selling pressure.
• Foreign selling in Korea is large; if local retail buying weakens, market liquidity and price volatility risks may rise.
• Global equity fund inflows have slowed significantly from the prior week, and some emerging market inflows are dominated by passive funds, limiting stability.
• There are differences in statistical methodology, cutoff dates, and investor classification across data sources, so flows from foreign investors, mutual funds, and domestic institutions cannot be directly equated.
• Southbound flows are concentrated in technology and internet sectors, which may increase position concentration and crowded-trade risk in popular stocks.

What to watch

• Whether weekly foreign selling in Korea narrows, and whether year-to-date cumulative outflows are approaching a cyclical peak.
• Whether India's US$1.2bn weekly foreign inflow can continue and form sustained positive reinforcement with strong domestic institutional buying.
• Whether GS Prime Asia net allocation, gross allocation, and overweight versus MSCI AC World continue to decline.
• Whether Korean leveraged ETF AUM, margin financing balances, and margin call ratios continue to improve.
• The total amount of southbound flows and the concentration of inflows into technology hardware and internet sectors.
• Whether the share of active flows in GEM and Asia ex-Japan fund inflows rebounds.
• Whether weekly net inflows into global equity funds slow further from US$33bn.
• Whether hedge fund net selling in China, Korea, Taiwan, China, and Japan reverses.