Korean securities firms are launching defensive investment products as KOSPI volatility reaches historic levels this year. The Korean stock market has triggered 31 sidecar activations in the current year, surpassing the 26 recorded during the 2008 financial crisis, while circuit breakers have been activated five times—accounting for nearly half of all 11 activations since the system's introduction in 2000. The surge in volatility has prompted firms including Korea Investment Securities to lower entry barriers for products previously limited to high-net-worth individuals, offering retail investors access to strategies that combine downside protection with upside participation. These defensive products address investor fatigue from repeated sharp market swings as KOSPI fluctuates within a 7,000-9,000 point range.
Loss-Differential Funds Absorb Downside Risk Through Tiered Structure
Loss-differential funds, colloquially known as "loss-blocking funds," have emerged as a volatility solution. Korea Investment Securities applied this structure—previously available mainly in private placements—to public funds, improving retail investor access. The structure designates general customers as senior investors and the securities firm as junior investors. When losses occur during fund operation, the junior investor absorbs losses first up to a specified threshold, making the structure advantageous during market corrections. Excess returns above the threshold are distributed with a higher allocation to the junior investor, which can limit upside potential.
Korea Investment Securities' "Korea Investment Global AI Innovation Industry Fund," launched earlier this year, illustrates the mechanics. Even if losses occur in underlying funds focused on AI semiconductors, energy infrastructure, and digital finance, customers face no losses until the fund declines beyond -15%, with the firm's junior capital absorbing initial losses. On the profit side, returns up to 10% are split 85:15 between customers and the firm, while returns exceeding 10% are divided 55:45.
The National Growth Fund, structured as a citizen-participation vehicle for strategic industries, also employs loss-differential design. Citizens participate as senior investors while government fiscal resources and sub-fund managers serve as junior investors, providing downside protection up to 20.8%. Korea Investment Value and Suseong Asset Management contribute the highest junior allocation at 5%, followed by KB Asset Management at 4% and Mirae Asset Asset Management at 3%. The fund offers additional tax benefits including up to 40% income deductions and a 9.9% separate taxation rate on dividend income. After first-round allocations sold out in five days, the government plans to supply an additional 600 billion won in the third quarter.
IMA Accounts and Long-Short Funds Reduce Volatility Exposure
Integrated Management Accounts (IMA) are identified as products enabling both principal preservation and return generation. Securities firms invest customer funds in high-quality investment banking assets such as corporate loans and corporate bonds, assuming direct guarantee obligations. Investors can expect returns around 4% annually, exceeding typical bank deposit rates. Mirae Asset Securities sold out its 95 billion won IMA No. 3 product launched in May, while NH Investment & Securities filled its 120 billion won quota for the No. 2 product within approximately three hours of opening subscriptions last month. Korea Investment Securities recently launched "Korea Investment IMA G1" with a raised benchmark return of 5%, though the maturity extends to approximately three years.
Investor interest in long-short funds has increased notably. These funds pursue returns through strategies that buy (long) undervalued stocks and sell (short) overvalued stocks, earning recognition for minimizing volatility damage. A representative product is Timefolio Asset Management's "Timefolio With Time Fund," which lowered the minimum subscription to 5 million won to improve investment accessibility. Since its September 2019 launch, the fund has never recorded negative annual returns, and last month achieved returns exceeding 37% year-to-date.
Shin Yun-ah, director of Woori Investment & Securities Gangnam Financial Center and active as a Woori Financial Insight Manager, stated: "Even when the KOSPI index plunges about 10%, long-short funds often limit declines to approximately 1.5%. As sideways movement between 7,000-9,000 points is likely to repeat for the time being, strategies that generate profits on the upside and defend against losses on the downside are more important than ever."
FAQ
What triggered the increase in KOSPI circuit breakers this year?
The Korean stock market has activated circuit breakers five times in the current year, representing nearly half of all 11 activations since the system's 2000 introduction. Sidecar activations reached 31 times, exceeding the 26 recorded during the 2008 financial crisis. Securities firms attribute this to heightened volatility as KOSPI fluctuates within a 7,000-9,000 point range.
How do loss-differential funds protect investors during market declines?
Loss-differential funds structure customers as senior investors and securities firms as junior investors. In Korea Investment Securities' Global AI Innovation Industry Fund, losses up to -15% are absorbed first by the firm's junior capital before affecting customer principal. The National Growth Fund provides even greater protection, with junior investors absorbing up to 20.8% in losses before senior investors experience any decline.
