A top executive has weighed in on the collapse of the hedge fund Situational Awareness, stating the losses were not caused by a coordinated effort by short-sellers. Bob Sloan, the founder of S3 Partners, told Bloomberg TV that the blowup stemmed from extremely concentrated positions in crowded trades. He added these positions were also highly leveraged, making them especially risky. "You had super concentrated positions and super crowded positions which were also super levered. He got caught up in the middle of it," Sloan said.
Sloan clarified that the blowup was not the result of a deliberate short squeeze. The AI-focused hedge fund had overexposed itself to a handful of leveraged, crowded bets. When the market shifted, the fund became vulnerable and faced heavy losses. S3 Partners' analysis of short-positioning data showed no evidence of a unified effort by short-sellers to drive down the value of the fund’s biggest holdings.
The data from S3 Partners revealed that short interest increased in some of the fund’s top holdings, such as T1 Energy Inc. and Iren Ltd. However, short positions declined in half of the top 10 holdings. This mixed picture, Sloan said, refutes the claim that the blowup came from a coordinated campaign by short-sellers to attack the fund.
AI Bets and Convertible Arbitrage
Situational Awareness made large investments in CoreWeave Inc. These kinds of securities attract hedge fund traders who use convertible arbitrage strategies. These strategies involve purchasing the bonds while shorting the underlying stock to hedge risk. As a result, short interest in those stocks rose this year, mostly because of hedging, not because traders expected the shares to fall further.
S3 data indicate that short interest in CoreWeave dropped by two-thirds since its June peak, and shorting in Core Scientific has completely reversed. This trend aligns with traders unwinding hedging strategies as the stock prices dropped. These are risk-management actions, not bets that the shares would continue to decline.
To reduce its risk after the selloff, Situational Awareness sold most of its public equity positions in a large transaction. Citadel, a major hedge fund led by Ken Griffin, acquired a big chunk of those holdings. This move helped the fund offload its risk and cut its exposure in the wake of the market downturn.
Founded by AI researcher Leopold Aschenbrenner, Situational Awareness made high-risk bets on fast-growing tech stocks. When the broader AI sector stumbled, those bets collapsed. The forced sale of its assets highlights the dangers of making concentrated, leveraged bets during periods of market instability.