Foreign Investors Sell North Asian Tech Stocks Again, Hedge Funds De-leverage Sharply in June

Overview

This report is Goldman Sachs' weekly Emerging Market fund flow monitor. The core conclusion indicates that although Emerging Market and Asian mutual funds achieved strong absolute returns (approx 25%-26%) in the first half of 2026, the capital side shows significant divergence: Foreign Institutional Investors (FII) continue large-scale withdrawals from North Asian markets (especially Korea and Taiwan), while Hedge Funds (HFs) performed significant de-leveraging operations in June, reversing the May buying record. At the same time, Retail investors and Southbound funds still maintained certain buying strength, especially retail buying in Korea and Taiwan was relatively active.

Core views

Foreign Capital Flow: North Asia Under Pressure, Non-Asia Mild Buying This week foreign investors withdrew massively from Asia (ex-China) markets again, single-week net outflow reaching $16 billion. This outflow was driven mainly by technology-concentrated Korea (-$12.9 billion) and Taiwan (-$3.5 billion). Reviewing the first half of 2026, ex-China emerging markets suffered approx $150 billion in cumulative foreign selling, with Korea (-$95 billion), India (-$29 billion) and Taiwan (-$22 billion) being main outflow areas; in comparison, Brazil became one of the few markets favored by foreign capital with $6 billion net inflow. Global and Regional Fund Performance: Strong Returns but Recent Outflows Although facing capital outflow pressure, Emerging Market and Asian mutual funds performed well in the first half of 2026, return rate approx 25%-26%, funds focusing on China also recorded 12% gain. About 60%-70% of large emerging/Asian funds year-to-date outperformed their benchmark index, this proportion higher than past 10-year average level of 54%-64%. However, recent capital dynamics show Global Equity Funds net outflow $14 billion this week (previous week $5 billion), where US Funds net sold $17 billion, European Funds sold $3.7 billion, only Japan Funds gained $1.9 billion buying. Broad-based Emerging Markets (GEM) Funds also flowed out $2 billion this week. Hedge Funds and Leverage: Significant De-leveraging in June According to Goldman Sachs Prime data, Asian stocks encountered large-scale net selling flow in June (5-year Z-score -2.0). Total leverage of Asian fundamental long/short managers dropped sharply from recent highs. Specifically, Korea market saw large sell-out flow in June, completely reversing year-to-date buying trend; Taiwan market faced tech stock selling pressure but net selling flow magnitude smaller. Total allocation ratio for China stocks flat at 7.8% (at 97th percentile of 5-year), but net allocation ratio dropped 47 basis points to 8.0% (at 46th percentile of 5-year). Retail and Southbound Funds: Retail Buying Support In contrast to institutional capital withdrawal, retail investors conducted net buying in Korea (+$7.4 billion) and Taiwan (+$2.6 billion) this week. Year-to-date, Asia markets attracted $74 billion in retail fund inflows. Additionally, Southbound Funds (Mainland investors buying HK stocks) saw small net outflow $0.2 billion this week, but year-to-date cumulative net inflow still as high as $39 billion. Notably, Korea leveraged ETF Assets Under Management increased to $43 billion, accounting for 1.4% of its free float market cap, this daily rebalancing fund flow may amplify intraday market volatility.

Analysis framework

The report adopted a typical fund flow analysis framework, segmenting market participants into Foreign Institutional Investors (FII), Domestic Institutional Investors (DII), Mutual Funds, Hedge Funds, and Retail Investors. By tracking EPFR, Exchange data, and Goldman Sachs internal Prime brokerage data, the report broke down market dynamics from two dimensions: 'Volume' (Net Fund Inflow/Outflow) and 'Price/Position' (Leverage Ratio, Allocation Ratio, Z-score). This method helps identify marginal impact of different fund attributes on markets, such as distinguishing behavior differences between Long-term Allocation-type Funds (Mutual Funds) and Short-term Trading-type Funds (Hedge Funds, Retail).

Methodology notes

• Quantitative/Factor/Portfolio TheoryBeta/alpha analysis

  Z-score Standardization Measures Fund Flow Abnormal Degree

  The report uses Z-score (such as -2.0 or 1.6) to measure deviation degree of current fund flow or leverage level relative to past 5-year historical mean. This helps readers judge whether current selling or buying behavior is normal fluctuation or extreme anomaly event, thereby evaluating market sentiment extremes.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Structural Segmentation of Fund Supply Side

  The report segments stock market fund supply side into Foreign Capital, Domestic Institutional, Public Funds, Hedge Funds, and Retail Investors. This segmentation reveals structural reasons behind seemingly contradictory market phenomena (such as index rising but foreign capital outflow), i.e., funds of different attributes are turning over.

• Financial Industry Specific Terminology

  Prime Brokerage Leverage and Allocation Monitoring

  Using Investment Bank Prime Brokerage data to monitor Hedge Funds' Total Leverage and Net Allocation. This is a high-frequency leading indicator observing Smart Money risk appetite change, sharp leverage decline usually signals de-risking process.

Key data

• Weekly Asia Ex-China Foreign Capital Outflow$16 billionDriven mainly by Korea (-$12.9B) and Taiwan (-$3.5B)
• H1 2026 Emerging Markets Ex-China Cumulative Foreign SellingApprox $150 billionKorea (-$95B), India (-$29B) were main outflow areas
• H1 2026 Emerging/Asian Mutual Fund Return25%-26%China-themed fund return 12%
• June Asia Hedge Fund Fund Flow Z-score-2.05-year data, showing large-scale net selling
• Asia Hedge Fund Total Leverage ChangeSharp declineFalling back from recent highs
• Year-to-date Asia Retail Fund Inflow$74 billionKorea (+$7.4B) and Taiwan (+$2.6B) retail buying this week

Impact & implications

The report reminds that although fundamentals and earnings supported strong returns in Emerging Markets in the first half, short-term capital side faces pressure from continued foreign capital outflows and hedge fund de-leveraging. Especially Korea market, both foreign capital and Hedge Funds are significantly reducing holdings, and expansion of leveraged ETF scale may exacerbate market volatility. For investors, need to beware of short-term price volatility risks brought by capital flow reversal, while monitoring whether retail funds can continue to absorb institutional sell orders. Foreign capital inflow into Brazil and other non-North Asian markets shows some funds seeking valuation valleys or diversifying risk.

Risks

• Daily rebalancing of Leveraged ETFs may amplify intraday market volatility, especially in the Korean market.
• Rapid de-leveraging by Hedge Funds may lead to liquidity tightening and sharp adjustments in asset prices.
• Continued foreign capital outflow from North Asian markets may constitute sustained selling pressure on local stock markets.

What to watch

• Whether foreign capital flows in Korean and Taiwanese markets stabilize.
• Whether Asian Hedge Fund leverage ratios further decline or bottom out.
• The sustainability of retail fund inflows and their supporting role on market bottoms.
• Whether Brazil and other non-North Asian emerging markets can continue to attract foreign capital inflows.