How AI Hedge Fund Situational Awareness Sold Stocks Under Lender Pressure

AI hedge fund Situational Awareness sold most of its publicly traded stocks to Citadel, another hedge fund, on July 30 after heavy investment losses left it under pressure to raise cash. Citadel bought the positions financed with borrowing, while Situational Awareness retained a smaller mix of public and private investments.

Leopold Aschenbrenner, a former AI safety researcher at OpenAI, launched the fund in 2024 around the expectation that more powerful AI would require far more chips, data centers and electricity. It gained 439% from the start of 2026 through June, according to Reuters, before telling investors that its portfolio value fell 67% in July.

How Both Sides of the AI Trade Lost

Situational Awareness owned shares in companies supplying AI’s physical infrastructure and took short positions in software businesses it expected AI to disrupt. Short positions gain when the shares fall and lose when they rise. In July, infrastructure holdings fell while software shares such as Adobe rose, hurting both sides of the portfolio.

Rajat Baijal, a Columbia University risk lecturer and a risk director in Citi’s wealth business, described both sides as bets on the same AI outlook. Buying infrastructure suppliers and betting against software incumbents expressed two parts of that view, rather than two independent sources of protection.

The S&P 500, a broad U.S. stock index, remained near record levels as those concentrated investments unraveled.

Borrowing Turned Losses Into Cash Demands

The fund used leverage, reportedly borrowing roughly $3 for every $1 of its own capital. Investors’ capital provided the cushion beneath the borrowed financing. As the investments lost value, that cushion shrank while lenders still required collateral backing their loans.

Lenders’ demands for additional collateral, known as margin calls, required the fund to raise cash. CNBC’s July 31 analysis described how selling holdings added pressure to falling stocks, generating further losses and cash demands.

Situational Awareness generated more than $200 million in fees for Goldman Sachs in 2026, more than any other client of the bank’s prime brokerage business, the Financial Times reported in September. Prime brokers provide financing and trading services to funds.

Collateral Helped Protect the Banks

International Financing Review, a financial trade publication, reported on August 14 that Situational Awareness never missed a margin call, citing people familiar with the matter. Earlier in 2026, changing margin requirements as AI shares rose had lowered loan-to-value ratios: the amount lent relative to the assets backing the loans. That gave lenders a larger cushion against a subsequent decline.

Banks also had recourse to public and private investments, including the fund’s Anthropic stake, IFR’s sources said. That gave creditors a possible claim on the private holdings if needed to recover their money.

The pace of falling prices mattered too. Sandisk, a digital storage manufacturer held by the fund, fell 56.5% from its June peak to its July low, while its largest daily decline was 14%. An equities banker who was not involved with the fund explained that a more gradual decline allows collateral collection and reductions in borrowing over a period such as 30 days.

Citadel Reduced the Risk It Acquired

In an August 21 client letter obtained by CNBC, Citadel founder Ken Griffin said the firm had reduced the investment risk carried by the positions it acquired. Citadel used large transactions known as block trades, totaling more than $4 billion in market value, to reduce that exposure.

Situational Awareness kept a book of roughly $10 billion in stocks and private investments after the deal, Reuters’ sources said. That included its stake in privately held AI company Anthropic.

Regulators Sought Trading and Leverage Records

The Securities and Exchange Commission, the U.S. securities regulator, sent subpoenas to the fund’s banks, Reuters reported on August 24. The inquiry concerned the timing of trades that triggered margin calls and communications about leverage with top lenders including Goldman Sachs, JPMorgan, Citigroup and Bank of America.

The records requests did not by themselves establish that the fund or banks were investigation targets. Situational Awareness said scrutiny was to be expected for high-profile funds with large returns or dramatic drawdowns and pledged full cooperation. The SEC and those banks declined to comment.

Options Trading Continued After the Sale

JPMorgan cut off lending and notified the fund that it would end the lending relationship after the losses, Reuters reported on September 11, citing a person familiar with the matter. Goldman Sachs, Citigroup and Bank of America remained active brokers. The terms of any continuing lending were unknown.

On the same date, CNBC reported that Situational Awareness had bought options on AI-related stocks late the previous week and early that week. The fund was taking market exposure again through contracts tied to share prices.

A purchased stock option gives its holder the right to buy or sell shares at a fixed price by a specified date. The buyer pays an upfront price called a premium, which can be lost entirely if the contract expires without value.

Whether fresh capital or assets remaining after July financed the fund’s new purchases is unclear.