Hedge fund Situational Awareness did not close due to bears sniper agencies: excessive concentration of positions and high leverage were the main causes

The Zhitong Finance App learned that after a sharp correction in AI concept stocks, hedge fund Situational Awareness sold a large number of stocks at a discount due to huge losses. However, the bear data analysis agency S3 Partners believes that the storm was not due to concentrated attacks by bears, but rather caused by excessive concentration of the fund's own positions, overcrowded transactions, and highly leveraged operations.

S3 Partners founder Bob Sloan said in an interview on Tuesday that judging from short position data, no clear signs of so-called “predatory transactions” were found. The data shows that although the holdings of some funds were increased by bears, the short positions of half of the top ten major stocks remained flat or even declined, and there were no large-scale shorting actions against this fund.

Sloan said, “At the end of the day, this is a fund with highly concentrated positions, extremely crowded transactions, and very high leverage. It can be said to be a typical example of a market bubble, and in the end, it just happened to be involved in this adjustment.”

According to the data, among the positions disclosed by Situational Awareness, the biggest increases in short positions since this year were T1 Energy (TE.US) and Iren (IREN.US), and the number of short sales increased by 122% and 98%, respectively; in contrast, short positions in SNDK.US (SNDK.US) and Applied Digital (APLD.US) fell 10% and 7%, respectively.

Situational Awareness was founded by former OpenAI researcher Leopold Aschenbrenner. Since this year, the fund has once become one of the best performing hedge funds in the market due to its heavy investment in AI infrastructure concept stocks. However, with the recent drastic adjustments in the AI sector, the market began to question whether the high valuations of related companies could continue, and the net value of the fund was quickly under pressure. Subsequently, the fund sold most of the listed stock assets through a major transaction, with Ken Griffin's Castle Securities buying a significant proportion of the relevant holdings.

Sloan further pointed out that some heavy stocks of Situational Awareness, such as CoreWeave (CRWV.US) and Core Scientific (CORZ.US), have issued convertible bonds. This type of stock usually attracts a large number of hedge funds that use the “convertible bond arbitrage” strategy to participate in trading, that is, buying convertible bonds while shorting the corresponding stock to hedge risks.

He said, “Short-selling these stocks by 30% to 40% is actually just a hedging operation, trading volatility, rather than simply betting on a further decline in stock prices.”

According to S3 data, short positions of CoreWeave and Core Scientific have indeed continued to increase since the summer of this year, but as the stock prices of the two companies fell, short positions also declined rapidly thereafter. Among them, CoreWeave's short positions have been reduced by about two-thirds from the June high, while Core Scientific's short positions have almost completely returned to previous levels.

Sloan believes that this change is more in line with the characteristics of the gradual elimination of hedging of convertible bond arbitrage positions as stock prices fall, rather than the fact that bears continue to increase shorting.