Citadel founder Ken Griffin has informed clients that the firm has significantly reduced its exposure to the asset portfolio acquired from hedge fund Situational Awareness, while also confirming a strong July performance for its flagship fund. According to CNBC, Griffin stated in a letter to clients on Friday that Citadel has cut more than 80% of the overall risk exposure in the stock portfolio taken over from Situational Awareness, involving trades exceeding $4 billion in size.

The positions were primarily concentrated in the AI and semiconductor sectors, including core long positions in Micron Technology and SanDisk, as well as related positions in Nvidia, Broadcom, and AMD. Griffin also confirmed in the letter that the flagship multi-strategy fund Wellington posted a 5.94% return for July, marking its best monthly performance since 2022.

According to the Financial Times, Citadel's large-scale selling of these holdings within just a few weeks suggests the firm has likely realized a substantial trading profit as tech stocks rebounded quickly. Citadel's intervention in Situational Awareness came at a time when AI-related trades were experiencing violent turbulence. Since then, the AI sector has bounced back, and the market widely believes that Situational Awareness's forced liquidation marked a temporary bottom for the selloff that began in June.

Citadel's Swift Acquisition and Rapid 80% Exposure Reduction

On July 29, Citadel entered negotiations with Situational Awareness; the following day, the two parties completed the transaction. Citadel took over the majority of the latter's public market stock positions at approximately a 10% discount, with the transaction size exceeding $4 billion. Subsequently, Citadel did not hold these assets long-term but instead quickly reduced risk exposure through block trades.

Griffin indicated that the firm completed over 100 block trades, reducing the overall risk exposure of the stock portfolio by more than 80%. This transaction coincided with the rebound of AI and chip stocks from the previous concentrated selloff. After Citadel stepped in, concerns about further forced selling eased, and the related stocks rebounded accordingly, creating a window for the firm's rapid exit.

Notably, the Wellington fund had gained only about 0.45% for the month before the final week of July when the trade was initiated, yet it ultimately closed the month with a 5.94% return. Griffin did not disclose the specific profit from this transaction, but given the pattern of buying at a discount and quickly reducing positions amid a market rebound, Citadel likely secured considerable trading gains.

AI Concentration Spins Out of Control, Situational Awareness Forced to Liquidate

Situational Awareness was founded by Leopold Aschenbrenner, a former OpenAI researcher, and rapidly accumulated over $20 billion in assets within about two years of its establishment. The fund was heavily positioned in AI themes while shorting certain software stocks, betting that AI would reshape the industry landscape. However, from June to July, AI trades suddenly reversed, putting pressure on both sides of the fund's long and short book.

Regulatory filings show that Situational Awareness significantly increased its holdings in Micron Technology and SanDisk in the second quarter, with combined positions of approximately $11 billion in the two companies, representing about a quarter of its net assets at the time. Meanwhile, the fund also reduced its option short positions in Nvidia, Broadcom, and AMD, further amplifying its net long exposure to the semiconductor sector. Subsequently, Micron's share price fell 29%, and SanDisk declined 47%.

The highly concentrated AI positions combined with leverage quickly exposed the portfolio to risk, ultimately triggering margin calls and forced liquidation. Aschenbrenner initially attempted to raise capital by selling assets item by item, but as losses widened, he ultimately turned to selling the majority of public market stock positions in their entirety, with Citadel becoming the primary buyer.

Not Citadel's First Rescue Acquisition

Griffin emphasized in his letter to clients that Citadel has excelled at proactively seizing opportunities during periods of market disorder for nearly 36 years. This is not the first time Citadel has taken over assets from a distressed hedge fund. In 2006, Citadel and JPMorgan took over the entire trading portfolio of Amaranth Advisors after its natural gas trading blowup. In 2007, Citadel also acquired credit assets from Sowood Capital Management after its collapse.

However, unlike these hedge funds that ultimately exited the market, Situational Awareness has not completely disappeared as a result of this fire sale. The fund still retains private market equity including Anthropic, as well as a small number of public market stocks. Aschenbrenner told investors earlier this month that despite the violent turbulence, Situational Awareness is still up about 80% year-to-date. The fund previously disclosed that its return exceeded 400% in the first six months of the year.

Looking at the outcome, this crisis was not simply a case of "betting wrong on AI," but rather a liquidity crisis that emerged when highly concentrated AI longs, weakened hedging positions, and leverage converged amid a rapid market reversal. For Citadel, however, this crisis provided a trading opportunity to buy at a discount and exit quickly during the rebound.