Washington, DC – A letter sent by the hedge fund Situational Awareness to investors, seen by Reuters, revealed that the value of its investment portfolio plummeted by 67% during July. This followed sharp losses in artificial intelligence (AI) stocks. Reuters reported, citing sources, that the AI-focused hedge fund, managed by former OpenAI researcher Leopold Aschenbrenner, sold most of its equity portfolio to Citadel, a company owned by billionaire Ken Griffin. Additionally, the fund liquidated most of its publicly traded equity holdings.
“We came closer than we would consider acceptable to incurring a permanent loss of capital,” Aschenbrenner wrote in his letter to investors, adding, “We let you down this month.” He explained that the company eventually found a solution. However, it had not intended to find itself in such a position. While The Wall Street Journal was the first to publish the contents of the letter, data showed that the fund’s significant gains since the beginning of the year kept its performance up by 80% through 2026. Aschenbrenner emphasized that the fund remains “very bullish” about its portfolio. He also indicated that the fundamentals underlying the investments continue to improve despite the sharp decline in prices. Since its launch in 2024, Aschenbrenner has garnered significant attention thanks to its focus on the artificial intelligence sector.
The global sell-off in chip stocks has revived concerns that the artificial intelligence boom may be losing momentum and that company valuations have reached unsustainable levels. This has wiped out gains from investors’ heavy bets on the sector. Meanwhile, short sellers have increased their positions in anticipation of further declines.
Hedge funds typically rely heavily on borrowing to increase their exposure and maximize returns. However, these leveraged bets quickly unravel when markets move against them, triggering margin calls. Aschenberger explained, “We worked to keep the portfolio within our risk limits, but it gradually became more difficult as positions moved against us and market liquidity declined.”
He noted that the fund had eliminated all leveraged positions. He also explained that losses were exacerbated by sharp movements in key positions last week. In addition to the AI losses, the company faced trading pressure on publicly associated stocks. He concluded, “These dynamics are very similar to a banking panic; one vulnerability breeds another.”
