HONG KONG - Hedge funds hunting for artificial intelligence-related stock market bargains are rushing into South Korea's chipmakers, betting a new wave of demand for high-end memory chips and government spending makes them more valuable.

Britain's Man Group, Singapore's FengHe Fund Management and Hong Kong's CloudAlpha Capital Management and East Eagle Asset Management are among the hedge funds seeking AI exposure in Asia that are looking to South Korean behemoths such as SK Hynix and Samsung Electronics, which have so far lagged the sector's rally.

"If we consider Nvidia the king of the AI story, then Hynix is the queen," said Matt Hu, chief investment officer of $4 billion FengHe, which has been buying Hynix and Samsung this year.

FengHe and other hedge fund investors believe the AI frenzy over the past year that trebled the value of U.S.-listed Nvidia's shares to more than $3 trillion has left behind stocks such as Hynix relative to more popular Asian AI players such as Taiwan's TSMC.

But the spotlight is turning to South Korean chipmakers as technology firms in the generative AI race scurry to secure high-bandwidth memory (HBM) chips manufactured primarily by Hynix, Samsung and U.S.-based Micron Technology.

Hynix is the top supplier of advanced HBM memory chips to Nvidia. FengHe's Hu estimates Hynix receives a larger proportion of its revenue from Nvidia than TSMC does, but Hynix trades at 9 times its 12-month forward earnings versus 23 times for TSMC.

There are other broader tailwinds to these shares, such as the South Korean government's 26 trillion won ($19 billion) support package for the chip industry and its new 'Corporate Value-up Programme', along the lines of similar efforts in Japan and China to improve shareholder returns.

The rush of hedge fund cash into South Korea's AI sector helped the benchmark KOSPI index register its best month in seven months in June. South Korean stocks attracted the strongest inflows among Asia emerging markets so far this year, and their biggest inflows since 2008, according to LSEG data.

The rewards of being invested in South Korea outweigh the big risks, hedge funds say, namely pressure from a depreciating Korean won and restrictions on short-selling of shares in the local market.

KOSPI is trading at 10 times 12-month forward earnings, compared with Taiwan's 18 times and Japan's 15 times.

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Samsung and Hynix account for about 30% of KOSPI by market capitalisation.

While Hynix shares are up more than 70% this year, Samsung is up only 12% and the overall KOSPI nearly 9%.

Beyond HBM chips, scarcity in the supply of broader memory chips has further bolstered South Korean suppliers. Samsung said last week it expected a more than 15-fold rise in its second-quarter operating profit, thanks to rising chip prices.

Sumant Wahi, a portfolio manager at Man Group focusing on technology stocks, expects prices of traditional Dynamic Random Access Memory (DRAM) chips to rise too because the chip industry has shifted too much capacity to manufacturing HBM.

"There's definitely an opportunity there," he said.

Pierre Hoebrechts, head of macro research at East Eagle Asset Management, expects Samsung to catch up in the second half due to its significant underperformance compared to TSMC this year.

The South Korean AI theme is also broadening beyond chipmakers.

Chris Wang, a portfolio manager at tech-focused CloudAlpha Capital Management, has invested in electricity equipment maker HD Hyundai Electric this year, betting the stock will benefit from the spurt in power consumption. Its shares are up 333% since January.

"Korea has the potential to sell more semiconductor equipment, cooling systems and even consumer electronics along with the growing AI ecosystem," said Simon Woo, Asia-Pacific technology research coordinator at BofA Securities.

The long-running Sino-U.S. technology war also ensures China keeps using South Korea's advanced memory chips, given Chinese chipmakers have so far been unable to compete while under U.S. export bans, Woo added.

(Reporting by Summer Zhen; Additional reporting by Rae Wee in Singapore and Gaurav Dogra in Bengaluru; Editing by Jamie Freed)