The soaring share prices of Samsung Electronics and SK Hynix are forcing a growing number of funds to hit the 10% single-stock holding limit, triggering passive selling to maintain compliance. As the two chip giants' market values repeatedly hit new highs, funds constrained by holding limit rules are frequently breaching the threshold. GAM Investment Management and Jupiter Asset Management have already begun adjusting their portfolios. Analysts believe the record net foreign outflows from South Korean stocks this year are primarily driven by such mechanical selling pressure due to compliance, which could further amplify market volatility. The holding limit rules were originally intended to prevent over-concentration. However, in the current chip stock rally, they have transformed into large-scale passive selling. Florian Neto, Head of Asia Investments at Amundi SA, stated that overly rapid market cap growth has forced investors to passively reduce holdings, and diversification is indeed necessary. The scale of forced selling is substantial, with foreign outflows reaching a historic record. Driven by the AI boom, global capital has flooded into Samsung Electronics and SK Hynix. The two stocks have surged 147% and 245% year-to-date, respectively, with their market capitalizations both surpassing $1 trillion. Yet, the sharp price inflation is triggering passive selling under the holding limit rules. According to Bloomberg data, as of Thursday, global investors have net sold $63.6 billion worth of South Korean stocks year-to-date, marking the largest monthly sell-off since 1999. Among this, Samsung and SK Hynice accounted for a combined net outflow of $58.6 billion. Goldman Sachs estimates that diversification rules have triggered approximately $69 billion in selling since late October. Funds focused on the South Korean market are struggling with the challenge of the two companies' rising weight. A team led by Goldman Sachs analyst Timothy Moe noted that if concentration continues to increase, selling pressure could intensify further, although much of the selling may be nearing its end. Samsung and SK Hynix account for over half of the market weight, forcing funds to seek alternative chip exposure. The root of the issue lies in the extremely high weight of these two companies in the South Korean stock market. Bloomberg data shows that Samsung Electronics and SK Hynix together account for 52% of the market capitalization of the Korea Composite Stock Price Index (Kospi), with Samsung Electronics at 27% and SK Hynix at 25%. This far exceeds the next-largest constituents like SK Square, Hyundai Motor, and Samsung Electro-Mechanics, each with a weight of only about 2%. Such a highly concentrated market structure means significant fluctuations in any single stock can drag down the entire index. It also makes diversified funds holding South Korean stocks more prone to hitting the holding limit. Under the constraint of holding limits, some investors are beginning to seek alternative ways to gain exposure to the semiconductor sector. Ha Seok Keun, Chief Investment Officer at Eugene Asset Management in Seoul, pointed out that investors might indirectly expand their chip industry exposure through affiliated companies, holding companies, or insurance companies that hold significant stakes in these two firms. This strategy provides a workaround for funds bullish on the long-term prospects of South Korea's chip industry but unable to increase direct holdings due to compliance limits. It could also bring additional capital inflows to related affiliated entities.