As Korean retail investors trading U.S. stocks bought more than 900 billion won worth of SK hynix American depositary receipts (ADR), a major U.S. asset manager delivered a scathing review, calling it an "incomprehensible, self-destructive pattern." The criticism directly targeted the inefficiency of Korean nationals paying extra fees and taking on currency risk to buy U.S.-listed ADRs of a stock already listed on the Korean stock market.
According to the Korea Securities Depository (KSD) Seibro securities information portal on the 24th, SK hynix ADRs were the second most net-bought issue by domestic investors over the past week (July 17–23). Over that period, domestic individual investors' net purchases totaled $135.76 million (about 200.2 billion won).
Cumulative net purchases from listing through the previous day (July 10–23) came to $613.67 million (about 904.8 billion won). Considering that, over the same period, individual investors net-bought 1.035 trillion won of SK hynix common shares listed on the domestic market, the net purchase sizes of the common shares and the ADRs are comparable.
Global finance experts issued strong criticism of this investment behavior. Owen Lamont, executive vice president at Acadian, a global quant hedge fund founded in 1986, called the price gap between SK hynix common shares and its ADRs "a completely crazy level of mispricing," adding, "It is truly incomprehensible that Koreans are buying the ADRs, and this is a self-destructive behavior pattern of Korean individual investors."
Lamont holds a Ph.D. in economics and is a financial market expert who served as a professor at Yale and the University of Chicago Booth School of Business and as a lecturer at Harvard. He added, "I do not know whether ADR prices are too high or the common share price is too low, but what is certain is that in a properly functioning market, the two prices should be the same."
He said, "I can at least understand the logic of foreign investors buying the ADRs, but I truly cannot understand Korean investors buying them," pointing out, "Koreans can easily buy SK hynix stock in the domestic market, yet they are paying $149 for stock worth $100."
He wrote that this ADR premium violates the "law of one price (LOOP)" and that such phenomena are often seen during stock market bubbles. In particular, he said it parallels Infosys, an Indian software company whose ADR premium reached 136% in March 2000.
He cited cross-market comparisons as a reason why SK hynix's ADR premium—up to 51%—is peculiar. Even U.S. investors can directly buy the common shares, and ADR premiums for other Korean corporations listed in the United States are almost nonexistent. He also pointed to the fact that the premium on SK hynix's global depositary receipts (GDRs) listed on the Frankfurt Stock Exchange in Germany is around 0%.
He explained, "Historically, whenever U.S. stocks were overvalued, foreign corporations rushed to list in the U.S. through ADRs and other means," adding, "There is research showing that when stock issuance by foreign corporations in the U.S. is abnormally high, subsequent U.S. stock returns were lower, and there was also a surge in ADR listings during the dot-com and COVID bubbles." Lamont also criticized last year that "as Korean retail investors poured in, a strange phenomenon emerged in which the U.S. market is increasingly becoming Koreanized."
Meanwhile, according to the Korea Securities Depository (KSD), the issuance limit for SK hynix ADRs has been fully used. The maximum number of SK hynix ADRs that can be issued, based on the underlying shares, is 25% of total shares outstanding, or 177.9 million shares.
If existing ADRs are later converted into underlying shares, the number converted will reopen issuance capacity for ADRs, and additional conversions of underlying shares into ADRs will be possible within that limit. However, given the current high ADR premium, the likelihood of ADRs being converted into underlying shares is low.