This defeat is not caused by a bear raid, but rather is the result of a threefold combination of extreme concentration, extreme overcrowding, and extreme leverage.
Written by: Zhao Ying, Wall Street Journal
The hedge fund Situational Awareness, founded by former OpenAI researcher and "AI stock god" Leopold Aschenbrenner, has recently encountered severe setbacks, being forced to sell stocks at a discount. However, data indicates that the root cause of this defeat is not a deliberate bear raid on the fund's major holdings, but the hidden dangers embedded in the fund's highly concentrated, highly crowded, and highly leveraged portfolio structure.
According to Bloomberg's report on Tuesday, Bob Sloan, founder of the short-selling data analysis firm S3 Partners, explicitly stated in an interview that S3's data did not find evidence of coordinated short-selling behavior targeting the fund's major holdings, nor was there a notable pattern of "predatory trading."
The sharp decline in AI-related stocks has led the market to question the sustainability of the high valuations in this sector, putting pressure on Situational Awareness, which eventually exited most of its public stock holdings through a large block trade, with Citadel, led by Ken Griffin, acquiring a substantial portion of those positions.
This event serves as a warning to the market: in an environment of extreme enthusiasm for AI concepts, extreme concentration combined with high leverage itself constitutes a significant vulnerability. Even without active suppression from external forces, the normal fluctuations in the market are enough to trigger a chain liquidation.
Short-selling Data: No Evidence of "Hunting"
S3 Partners' data shows that among the top ten holdings of Situational Awareness, approximately half of the short interest is stable or even declining, which does not support claims of coordinated short-selling suppression from the outside.
According to Bloomberg, Bob Sloan clearly stated in the interview: “To clarify, these are super concentrated, super crowded positions that are also super leveraged. This is a textbook case of a bubble; it just got caught up in it.”
From the perspective of specific holdings, S3 data shows that so far this year, the stocks with the largest increase in short interest are T1 Energy Inc. and Iren Ltd., rising by 122% and 98%, respectively; while the short interest in Sandisk Corp. and Applied Digital Corp. has decreased by 10% and 7%, respectively. This divergence further indicates that there is no targeted short-selling campaign against the fund's overall holdings.
Convertible Bond Arbitrage: Some "Shorts" are Actually Hedges
Bob Sloan also pointed out that some of the fund's major holdings—including CoreWeave Inc. and Core Scientific Inc.—have outstanding convertible bonds in circulation. This characteristic naturally attracts hedge funds that deploy convertible bond arbitrage strategies. The operating logic of such strategies is to buy bonds while shorting the stock, essentially hedging volatility rather than betting on further declines in stock prices.
S3 data corroborates this judgment: short interest in CoreWeave and Core Scientific continued to accumulate before the summer, but as stock prices fell, shorts were promptly reduced. The short position in CoreWeave has been cut by two-thirds from its peak in June, while Core Scientific's shorts have almost completely reversed—this pattern aligns closely with the behavior of closing hedged positions in convertible bond arbitrage as the underlying stock declines.
High Concentration, High Crowding, High Leverage: The Real Root of the Defeat
Situational Awareness was founded by AI researcher Leopold Aschenbrenner, and the core logic of the fund is built upon a highly bullish outlook on AI-related stocks. However, it is precisely this extremely concentrated portfolio structure that left the fund with almost no buffer when valuations in the AI sector were called into question and stock prices tumbled.
Bob Sloan's statement hits the nail on the head: extreme concentration, extreme overcrowding, and extreme leverage have combined to make the fund itself an amplifier of market volatility. Once the market turns, the pressure to deleverage will far exceed any impact from external short-sellers.
The fund ultimately executed an emergency self-rescue in 24 hours, exiting most of its public stock holdings through block trades, with Citadel taking over a significant proportion of those positions. This hurried exit can be seen not as being crushed by bears, but rather as a necessary collapse of its own position structure under market pressure.
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