Situational Awareness collapsed from $45 billion in assets last week as its AI stock positions faltered. Prime brokers including Bank of America, Goldman Sachs, and JPMorgan Chase found themselves in a sudden reckoning. The fund, led by Leopold Aschenbrenner, offloaded most of its public equities in a fire sale to Citadel.
Bank of America CEO Brian Moynihan called the fund's near collapse a warning for Wall Street. He told CNBC's Andrew Ross Sorkin that high valuations and borrowed money are fueling markets. 'Valuations get out, leverage in the system gets there,' Moynihan said. 'You have to be careful.'
Situational Awareness rode AI optimism since 2024, growing to $45 billion in assets before the recent selloff. Moynihan suggested the crisis is pushing Wall Street to reevaluate its risk in leveraged firms. 'The tendency is to tighten the underwriting standards, just a hair,' he said. 'Especially with big run-ups in stocks.'
The fund's concentrated bets on AI hardware suppliers like SK Hynix led to panic when it faced margin calls. As AI stocks fell, Situational Awareness sold assets into a crashing market. This forced losses upward and triggered a cycle that nearly collapsed the firm.
Citadel's $45 billion rescue calmed the market. AI infrastructure shares rebounded, stabilizing the positions Citadel acquired. But Moynihan stressed the broader warning. 'These are all warning shots,' he said. The question remains how Wall Street will respond to similar risks.
Situational Awareness had built concentrated positions among some of the market's biggest AI beneficiaries. Public filings showed large stakes in Nebius, Bloom Energy, Sandisk, CoreWeave, SharonAI and IREN as of March 31. By Wednesday's close, those shares had fallen between 50% and 78% from recent peaks.
At the same time, software stocks like Adobe that had been used as the short leg of the trade rallied. That meant the fund wasn't protected by its hedges. Instead, the longs and shorts lost money simultaneously. 'People get over leveraged in this market, and they get seduced by the big returns that some of these companies can deliver,' said Bob Lang, founder and chief strategist at Explosive Options. 'If you're not managing your risk properly, this is the sort of thing that's going to happen to you.'
As the value of the portfolio fell, the fund's equity cushion shrank and its prime brokers demanded additional collateral. Raising cash required selling more holdings, adding further pressure to sliding stocks and generating additional losses. What might otherwise have been a painful drawdown became a deleveraging spiral.
The episode offers a stark example of how a hedge fund can sustain devastating losses even when major stock indexes appear relatively calm. The S&P 500 remained near record levels as the damage unfolded, masking one of the most violent reversals in market leadership in decades. Morgan Stanley's sector-neutral Momentum Index tumbled 17.4% in just four trading days, its worst such decline on record, according to BTIG. The drop surpassed the momentum reversals that followed the dot-com bust, the pandemic shock and the 2022 inflation-driven bear market.
AI infrastructure stocks rebounded sharply Thursday as investors increasingly interpreted the previous several weeks of volatility as the product of a technical dislocation rather than a deterioration in the industry's fundamentals. With one of the market's largest forced sellers stepping back, traders rushed into many of the same chipmakers, power companies and data-center plays that had been at the center of the selloff. The tech-heavy Nasdaq Composite jumped for a second day Friday, on track for a weekly gain of 0.9% after suffering steep losses the last two weeks.
Still, not everyone believes the forced unwind marks the end of the AI selloff. Among the most prominent skeptics is Michael Burry of 'The Big Short' fame. Burry has been one of Wall Street's most vocal critics of the AI boom, arguing that much of the industry's demand is being sustained by financing arrangements rather than end customers. Rather than viewing Thursday's rebound as a turning point, Burry used the rally to add to bearish positions in Micron, the VanEck Semiconductor ETF and Nvidia put options. 'The knee-jerk reaction to the Paired Momentum unwind yesterday has been to put it back on today,' Burry wrote. 'This was a historic reversal, even more so than what happened 26 years ago,' when the dot-com bubble began to burst in 2000. Burry said oversold and overbought conditions made a short-term bounce unsurprising, but he questioned whether the trade still had staying power. 'The legs,' Burry wrote, 'they look tired.'