Around 80 high-net-worth clients of Hana Securities reportedly suffered losses exceeding $37.5 million (50 billion won) on Aug 5, a day when the domestic stock market experienced a historic plunge.
On average, each client lost about around $470,000. On that fateful day, now being called ‘Black Monday,’ the KOSPI index dropped 8.8% from the previous trading day, marking the largest single-day decline in South Korean market history.
According to the financial industry, about 80 clients of Hana Securities’ Club 1 WM Center, who had invested in the Hana Securities’ Asset Allocation Strategy Wrap Account, incurred significant losses of over $37.5 million.
A Wrap Account is a managed account where a variety of financial products, such as stocks, bonds, and derivatives, are tailored to the investor’s needs. The Club 1 WM Center, established in 2017, is an exclusive branch of Hana Financial Group designed to manage the assets of the ultra-wealthy, typically those with over $22.5 million in financial assets.
This product was driven by a short straddle strategy in KOSPI options, which took a direct hit when market volatility surged. The short straddle strategy involves selling both call options (the right to buy) and put options (the right to sell) simultaneously, generating income from the option premiums when market volatility is low. This strategy can yield steady profits as long as stock prices remain within a certain range. However, if prices move beyond the anticipated range, the potential losses can be infinite.
Investors who suffered losses claim that the fund managers at Hana Securities failed to manage the risk appropriately, leading to significant damage. One investor said, “There were signs of a potential stock market decline, so they should have adjusted the portfolio in advance, but they did not.”
He added, “On the morning of Aug. 5, there was still enough time to alter or reduce the positions, even if it meant accepting some losses. However, due to the managers’ complacency, the sudden plunge in stock prices in the afternoon led to an increase in the required additional margin (margin call), and the two managers in charge were unable to respond effectively, resulting in substantial losses.”
This suggests there were gaps in the management and operation of the Wrap Account. However, Hana Securities has not yet commented on these allegations.
Earlier, DY Asset Management, which primarily manages products focused on IPO investments, also saw its private fund’s returns plummet after employing a short straddle strategy during the market crash on Aug. 5. DY Asset Management’s assets under management (AUM) shrank by 45%, from $102.6 million on Aug. 2nd to $56.5 million on Aug. 5, due to the market crash.
In fact, other asset management firms have faced similar crises in the past due to large losses from short straddle strategies.
In 2010, Wise Asset found itself on the brink of bankruptcy after suffering losses six times greater than its net assets while employing a short straddle strategy with a public fund.
An industry insider commented, “The short straddle strategy can yield consistent returns under normal conditions but can lead to massive losses when market volatility spikes. If the risks are not properly communicated to clients, it can lead to significant disputes. During the 2008 financial crisis, even boutique firm owners who employed this strategy suffered severe losses, with some tragically taking extreme measures.”
