Deutsche Bank researchers have warned that recent turmoil in South Korean equities and the rapid liquidation of a hedge fund’s AI-related stock positions may reflect the same vulnerability: leverage accumulated during more than a decade of low and stable interest rates is making markets more prone to forced selling.
In a report dated Aug. 3, researchers led by Templeman argued that the unwind at hedge fund Situational Awareness and the violent reversal in South Korea’s KOSPI should not be treated as unrelated market accidents. Both episodes showed how borrowed money can turn an ordinary decline into a self-reinforcing selloff, with margin calls forcing traders to close positions before prices have a chance to recover.
That mechanism reaches beyond traditional equities. Cryptocurrency markets operate continuously, offer widely available leverage, and lack the trading halts used by many stock exchanges during exceptional moves. The Deutsche Bank analysis does not focus on digital assets, but its account of leverage-driven selling describes a familiar risk for token markets, where automated liquidations can rapidly compound declines.
Two market shocks, one leverage problem
Situational Awareness unwound $16 billion of equity positions after a leveraged trade connected to AI-related shares moved against the fund, according to Deutsche Bank’s report. The episode added to concerns about crowded positioning in technology names, where strong gains have encouraged traders and funds to use derivatives or borrowed capital to increase exposure.
The South Korean market provided a more immediate example of how leverage can affect households as well as professional funds. The KOSPI fell more than 20% in 48 hours, then rebounded 25% from its low and ended the week close to unchanged, Deutsche Bank said.
A near-flat weekly result can conceal severe damage inside individual accounts. Traders who held unleveraged positions may have remained exposed long enough to benefit from the rebound. Those who received margin calls during the initial fall could have had their positions closed near the bottom, leaving them unable to participate in the recovery.
Deutsche Bank described that sequence as forced deleveraging: brokers mechanically close leveraged positions once account collateral falls below required thresholds. Selling generated by those closures can deepen the decline in the underlying asset, triggering more margin pressure and another round of sales.
The bank said South Korea’s move was amplified by recently launched single-stock leveraged exchange-traded funds linked to Samsung Electronics and SK Hynix. Those products began trading in April and gave retail traders a way to take amplified positions in two of the country’s largest and most widely held technology stocks.
Leveraged ETFs generally seek to deliver a multiple of an asset’s daily return. Their daily rebalancing can require the fund to add exposure after gains and cut exposure after losses, a structure that can intensify market moves when volatility rises sharply. In a market already dominated by heavily traded mega-cap stocks, the addition of retail-accessible leverage can increase the speed of a downturn.
A low-rate legacy meets higher volatility
The report traces the problem back to the long period of cheap funding that followed the global financial crisis. Low interest rates reduced the immediate cost of borrowing and coincided with subdued day-to-day market volatility, conditions that encouraged traders, companies and funds to add leverage across a range of assets.
As interest rates normalized and economic uncertainty increased, that positioning became harder to maintain. Deutsche Bank said its data show that VIX spike events have occurred more frequently since 2022 than the average over the previous decade. The VIX measures expected volatility in the S&P 500 and is commonly used as a broad gauge of market stress.
More frequent volatility shocks create a difficult environment for strategies built on the expectation that markets will remain calm. A leveraged position can be profitable for long periods when price changes are modest, then become vulnerable within hours when an unexpected move forces collateral adjustments.
Deutsche Bank also argued that traditional defensive assets have delivered inconsistent protection since 2020. The bank cited episodes including the pandemic market shock, the 2022 rate-hiking cycle, a 2025 tariff shock and the 2026 Iran war. Gold, the U.S. dollar, the Swiss franc, the Japanese yen, U.S. Treasuries and German bunds have each struggled to hedge every type of stress event, according to the report.
That weakens a common assumption behind leveraged portfolio construction: that a trader can offset risk in one asset class with a reliable haven elsewhere. When correlations shift during stress, hedges can lose effectiveness precisely when margin requirements rise.
Crypto markets have fewer pauses
The same mechanics are particularly relevant to digital assets, where perpetual futures and margin products allow traders to take large positions with relatively small amounts of collateral. Price moves can occur at any hour, while liquidation systems on derivatives platforms typically execute automatically once a maintenance margin threshold is breached.
Unlike major equity venues, many crypto trading platforms do not use market-wide circuit breakers to pause trading during rapid drops. Liquidations may therefore feed directly into order books during thin liquidity periods, especially on weekends or outside major market hours.
The resulting price move can be much larger than the initial selling that triggered it. A modest decline can force the closure of long positions; those forced sales add downward pressure; lower prices then place additional accounts below collateral requirements. The process is mechanical rather than discretionary, which makes a later rebound irrelevant to traders whose positions were already closed.
Deutsche Bank’s warning also complicates the idea that leverage is confined to speculative corners of finance. The bank said similar leveraged ETF products have expanded in the United States and Europe, raising the prospect that a sharp unwind could extend from an individual fund or stock into household balance sheets, credit markets and retail participation.
Risk remains in older corporate positions
The bank identified private equity as another area where leverage from the zero-rate era may remain embedded. It said private equity firms still hold substantial technology, media and telecommunications assets acquired when financing costs were low, with many investments retained longer than originally planned as exit markets became more difficult.
Listed companies may carry a related legacy. Deutsche Bank pointed to underperforming assets acquired during a debt-supported mergers and acquisitions cycle, arguing that low asset turnover may reflect years when cheap capital rewarded revenue expansion more readily than profitability.
The report’s comparison with Silicon Valley Bank underlines how quickly a contained problem can become system-wide when confidence and collateral deteriorate together. Deutsche Bank said events that later prompt broad policy action can appear limited in their early stages.
For crypto traders, the practical implication is less about predicting the next shock than recognizing the structure of the risk. Leverage can magnify gains during calm markets, but it also places ownership of an asset partly in the hands of margin rules, automated liquidation systems and the liquidity available during a sudden decline.
Learn how market volatility impacts traders’ behavior in our guide on cryptocurrency market sentiments and strengthen your risk strategy.
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