Leopold Aschenbrenner's Situational Awareness hedge fund rapidly liquidated its stock portfolio, selling to Citadel amid market challenges.
On July 30, Situational Awareness, a hedge fund established by former OpenAI researcher Leopold Aschenbrenner, executed a rapid liquidation of much of its publicly traded stock portfolio, as reported by CNBC.
The fund's Bitcoin mining shares experienced a notable price surge of 18-30% following the latest trading session, according to reports from March 31.
Quick Sale to Citadel
Citadel, led by Ken Griffin, acquired the portfolio at a discount, outbidding competitors such as Millennium Management and Jane Street, who had been considering the assets. This transaction was orchestrated by Goldman Sachs, JPMorgan Chase, Bank of America, and Citigroup, as noted by Reuters.
The deal was finalized within a day, commencing discussions on Wednesday evening and concluding by Thursday morning. With the market declining, the fund sought a single buyer for the entire portfolio to mitigate further losses. Aschenbrenner had previously offered shares valued over $10 billion, according to The New York Times, and the crisis unfolded over a short span of about a day and a half.
While the exact value of the deal remains undisclosed, reports indicate that Citadel primarily acquired positions purchased on margin, with some unleveraged assets potentially remaining with the fund. Before the sale, Situational Awareness's public investments were estimated to be around $16 billion, making this one of the largest transactions in the U.S. equity market.
Post-sale, the fund retained assets valued at approximately $10 billion, including private investments. Wall Street's response was cautious, recalling the significant losses tied to the Archegos collapse in 2021.
Struggles with Leverage
Aschenbrenner's fund faced multiple challenges, particularly with investments in AI infrastructure, as shares of companies like Nebius Group, Sandisk, Micron, and CoreWeave saw declines exceeding 35% by the end of July. Significant losses were also recorded in other major positions, including SK Hynix and Bloom Energy. Additionally, the fund's short positions on software firms like Adobe hindered its performance.
Due to leveraged positions, the decline in stock values diminished the collateral for the fund's loans, prompting prime brokers such as Bank of America and Goldman Sachs to demand increased collateral. It remains unclear if formal margin calls were made before the deal. Estimates of Situational Awareness's size have varied, with a peak valuation of $45 billion in early July, while others placed it between $20 billion and $24 billion prior to the collapse.
Just weeks prior to the liquidation, Aschenbrenner reported a staggering 439% gain for the first half of the year and a 1551% return since inception in a letter to investors dated July 24. He acknowledged the tech sector's downturn but viewed it as a favorable buying opportunity, encouraging clients to increase their investments starting August 1.
By the end of July, losses had reportedly reached around 67%. Aschenbrenner attributed these losses largely to short sellers targeting the fund's positions.
Key private investments, such as a stake in Anthropic, were excluded from the Citadel agreement, although the fund had contemplated selling them. A proposed deal to sell a stake in developer Claude for approximately $3.5 billion fell through, despite prior investments from Greenoaks and Sequoia Capital in Anthropic.
Impact on Bitcoin Mining Stocks
In trading on July 30, stocks of Bitcoin mining companies surged, with IREN experiencing the highest rise at 30.54%, followed by Bitdeer at 24.72%, Riot Platforms at 21.27%, CleanSpark at 21.07%, Core Scientific at 20.36%, and HIVE Digital at 18.34%.
All six companies were included in the fund's Form 13F filing on March 31, detailing significant shareholdings. However, it remains uncertain if the fund held these stocks immediately before the sale.
IREN's stock spike was partly driven by the announcement of new contracts for cloud AI services totaling $2.8 billion and an increased target for annual revenue growth in AI Cloud to over $4 billion by 2026. Major clients include Microsoft and NVIDIA.
In July, Alphabet also recorded its first negative free cash flow due to substantial investments in AI infrastructure.
