16 billion "bloody chips" have been settled: Has the AI deconstruction wave from Citadel hit the bottom, or is it the starting point for a domino effect?

Billionaire Ken Griffin's Citadel, a hedge fund giant, has reached a deal with the struggling hedge fund Situational Awareness, which is ensnared in a collapse crisis. This transaction helped trigger a global resurgence in AI-related stocks, particularly semiconductor stocks closely associated with AI computing power, leading to a long-awaited "irrational exuberance" super rebound. This has sparked intense debate among Wall Street traders: has the worst phase of AI sell-offs passed, or will there be more stock market liquidation events related to the AI computing infrastructure supply chain in the future? On Thursday in the U.S. stock market and Friday in the Asia-Pacific stock market, the semiconductor sector, closely linked to AI computing infrastructure, experienced a huge rebound from "extreme leveraged position forced liquidations" to "retaliatory buying." When considering the recent performance reports and future outlooks of industry leaders in the AI computing supply chain, including Lam Research, Samsung Electronics, UMC, TSMC, SK Hynix, and Seagate, the conclusion seems clearer: the physical demand associated with AI computing infrastructure has not deteriorated in sync with the plummeting stock prices and extreme leveraged positions being liquidated. After suffering severe sell-offs leading to circuit breaker-style declines over three consecutive trading days, the Korean Composite Stock Price Index (KOSPI), bolstered by two global super memory chip giants, SK Hynix and Samsung Electronics, surged by a record 18%. TSMC, which controls nearly all of the world's AI chip capacity, contributed to an 8% increase in the benchmark stock index of Taiwan, which holds substantial market weight. Meanwhile, Japan's Nikkei 225, home to leaders such as Kioxia, Tokyo Electron, and Advantest in the AI computing supply chain, also rose by 4%. On Thursday, a widely watched index of U.S. semiconductor giantsthe Philadelphia Semiconductor Index, regarded as a "global semiconductor barometer"achieved its largest increase since April 2025. As shown in the above chart, the Korean Composite Stock Price Index skyrocketed by about 18%, and optimism surrounding AI has returned in full force. Some market participants believe that the forced liquidation of nearly all of Situational Awareness's public market AI investments helps explain the ongoing strong de-leveraging and severe selling pressure in the global semiconductor sector since July: a round of selling can transmit repeatedly across global markets, evolving into another wave of super selling. Before retail investors and professional traders substantially reduced their borrowing, the margin financing scale in the Korean financial market even reached a historic high last month. After Citadel acquired most of the public stock portfolio at a discount, the market no longer had to endure the high leverage hedge fund selling off shares one by one on the exchange. Other investors also no longer had to worry about unknown large-scale forced liquidation orders. Consequently, short covering, dealer hedging adjustments, and fundamental capital inflows collectively created the violent rebound in global semiconductor stocks that began on Thursday. By absorbing most of Situational Awarenesss public stock portfolio, Citadel effectively removed a persistent, indiscriminate, and price-insensitive forced seller from the market. Coupled with tech giants like Microsoft and Amazon alleviating concerns over AI investment returns, as well as positive signals regarding AI computing demand expansion from TSMC, UMC, and Seagate, the KOSPI then recorded a historic increase of 17.91%. Micron, AMD, TSMC, along with Samsung Electronics and SK Hynix, led a retaliatory rebound in global chip stocks. This largely indicates that the marginal price setters in the market have rapidly shifted from margin calls, leveraged ETF redemptions, and forced liquidations to short covering, institutional and retail investors buying on dips, and the continuing strong outlook for the fundamentals of AI computing. After clearing its leverage, Situational Awareness indicated that the most intense mechanical selling pressure may have passed, but it does not prove that all over-leveraged institutions have been cleared; even with the KOSPI surging nearly 18% in a single day, it remains about 30% below historical highs. The Philadelphia Semiconductor Index has still accumulated a decline exceeding 20% in July, having retreated nearly 30% from its June peak at one point. The vibrant, competitive bullish atmosphere surrounding the fundamentals of AI computing may have returned, but the trajectory of a super bull market driven by AI still requires confirmation from earnings reports, orders, AI capital expenditure returns, and a technical low that does not break. From the 165-page AGI prediction to the "most crowded longs" finally collapsing, the AI version answer may understand the industry but lost its positions, with the 439% myth defeated by the leverage cliff. Leopold Aschenbrenner's brilliance stems from directly transforming a highly penetrating technical judgment into capital market positions: he graduated first from Columbia University at 19 and joined OpenAI's "super alignment" team. In 2024, he released a 165-page report titled "Situational Awareness," asserting that AGI will force the world to purchase AI data center delivery processes comprehensively covering power equipment, liquid cooling, CPUs, DRAM/NAND/HBM, optical communication/optical interconnects for data centers, high-performance Ethernet network infrastructure, transformers, and gas turbines at an exponential demand pace. He subsequently established a fund named after himself, attracting notable capital from Jane Street, the founders of Stripe, among others, with its managed scale surpassing $20 billion within two years. By the end of June 2026, the fund registered a staggering 439% net return for the year, exceeding 1000% since its inception, becoming the most legendary concentrated bettor in this round of the AI bull market, even praised by some retail investors as the "version answer beneath the AI super investment craze." His collapse was not due to the sudden failure of AI's long-term logic, but rather the same macro narrative controlling both long and short sides, as well as the financing end. Situational Awareness concentrated its holdings in AI storage, cloud computing, and power infrastructure assets such as SK Hynix, SanDisk, Nebius, CoreWeave, and Bloom Energy, while establishing shorts on some software companies that might be disrupted by AI; after the crowded trade in AI hardware reversed in July, long assets fell simultaneously, while some shorts rose in contrast, making the correlation surge during the pressure period and turning what appeared to be a long-short hedge combination into losses in the same direction. The hedge fund he managed once fell approximately 67% in July, forcing a choice between "rapidly raising new capital" and "selling public market positions," ultimately transferring most of its approximately $16 billion public stock portfolio to Citadel. Primary brokers such as Goldman Sachs, JPMorgan, Bank of America, and Citigroup participated in the coordination, and after the transaction was completed, the fund retained about $10 billion in assets, including private equity like Anthropic. Therefore, saying "the fund is entirely zero" or "Citadel acquired all assets" is inaccuratewhat was truly destroyed was its high-leverage public market strategy. The so-called "overnight collapse" essentially reflects weeks of paper losses reaching a financing tipping point within 24 to 36 hours, suddenly evolving into a liquidity event. The danger of leveraged positions lies not in ultimately judging the wrong direction, but in net assets being merely a thin cushion beneath total exposures: with a fourfold total exposure as a mechanical example, if the asset portfolio falls 25%, it theoretically could swallow the entire initial equity, after which primary brokers would raise margin requirements, reduce financing limits, and demand the fund to liquidate positions. Once the market identifies that an institution has become a price-insensitive forced seller, other trading desks may indeed sell its overlapping positions in advance, buy protection, or establish shorts, further worsening execution prices. Citadel's key role was not to "save a genius," but to transform potential forced sell positions that had been impacting exchange prices for weeks into a bulk asset transfer taken up by an institution with stronger capital strength. Once the market confirmed that Situational Awareness no longer needed to continue its disorderly sell-off, supply from sellers diminished sharply, leading to short covering and fundamental buying entering simultaneously: the KOSPI recorded a historic rise of 17.9%, with Samsung Electronics and SK Hynix jumping approximately 28% and 30%, respectively, while the Philadelphia Semiconductor Index also rebounded strongly. Has the crowded AI trade liquidation ended, or is it the eve of the dominoes falling? The most profound conclusion from the end of this myth is that while Aschenbrenner may have accurately identified the long-term direction of the AI computing industry, he mistakenly equated technological certainty with stock price path certainty. HBM, NAND, advanced packaging, CPUs, optical interconnect devices, and demand for power and liquid cooling may continue to grow, but a good investment strategy must be able to withstand valuation compression, sudden changes in correlation, tightening financing conditions, and the reversal of crowded positions. The core of the "Kelly Criterion" is not "if the win rate is high, you should heavily invest," but rather to maximize long-term compounding and avoid bankruptcy; once a position exceeds the optimal ratio, even if the industrial judgment is ultimately correct, short-term variance is sufficient to force investors out before realizing themes. Situational Awareness demonstrated the most brutal rule of this AI bull market: the market rewards not those who see the future earliest, but those who both see the future and have enough liquidity to live until that future arrives. "This is indeed part of the ongoing selling pressure that has existed over the past few weeks," said Calvin Yeoh, co-manager of the Merlion Fund at Blue Edge Advisors, referring to the plight of the hedge fund under Leopold Aschenbrenner. "At the same time, all retail investors employing extreme leverage strategies in Korea have basically been wiped out, and there are no more large-scale selling forces left." "However, this does not mean the market will rebound all the way back," Yeoh added. "It just means that, for now, the leverage clearing has essentially been completed." The rebound in the past two days has brought a close to the tumultuous July. The Philadelphia Semiconductor Index has still accumulated a decline exceeding 20% this month, marking the worst monthly performance since the global financial crisis. In July, the KOSPI accumulated a 22% decline, with SK Hynix and Samsung Electronics being the primary drags. Ironically, these two stocks had previously propelled the Korean stock market to become the best-performing market globally earlier this year. The investment portfolio of Situational Awareness once included SK Hynix, whose American depositary receipts briefly fell below their issuance price. The sudden eradication of the brilliant moment surrounding Situational Awareness inevitably recalls the collapse of Long-Term Capital Management (LCTM) in 2008. Yeoh is not the only one who believes the selling pressure has eased temporarily, but this incident has led investors to begin questioning whether there are other funds facing similar predicaments. Some trading desks have compared it to the rapid collapse of Long-Term Capital Management in 1998, when systemic risks due to this event prompted Federal Reserve policymakers to organize a bailout. Some analysts have also recalled the series of bank and fund acquisitions during the global financial crisis. "If Situational Awareness has appeared, how many similar institutions are there in the market?" asked Cusson Leung, Chief Investment Officer at KGI International Wealth Management. "This morning, it reminded me of a very similar scenario, which was when JPMorgan acquired Bear Stearns in 2008." He noted in an interview. "At that time, the market also experienced a bailout-style rebound, only for Lehman Brothers to declare bankruptcy soon after." The asset value held by Situational Awareness has plummeted from $45 billion at the beginning of July to about $10 billion. Aschenbrenner was forced to liquidate positions to meet margin calls. Subsequently, sources familiar with the matter, who requested anonymity due to private information, revealed that Citadel contacted Situational Awareness and purchased most of its investment assets at a discount. "The more important question is whether this is the only excessively leveraged area in the market." Ulrich Urbahn, Head of Multi-Asset Strategy and Research at asset management giant Berenberg, stated. "If there are other funds similarly concentrated in AI, computing, and semiconductors, then this liquidation might just be the first domino to fall, rather than the last." According to exclusive statistics from Bloomberg Intelligence, over the past two weeks, leveraged exchange-traded funds (ETFs) linked to Samsung Electronics and SK Hynix have also experienced a large-scale net outflow; these products were previously considered factors that exacerbated market volatility in Korea. Bloomberg Intelligence's data shows that as of Thursday, the assets under management of these funds plummeted from over $11 billion on June 25 to $4.1 billion. The Korean government promised to take further measures to stabilize the market this week and stated it will restrict retail investors from participating in leveraged ETFs. "We have already seen large-scale leveraged bets being cleared, and this process is nearing completion. The rescue of Situational Awareness is just the final piece of the puzzle in the short term," said Joshua Crabb, Head of APAC Equities at Robeco. "Asia has thus benefited significantly, as valuations were already relatively low, and some technology stocks related to AI computing infrastructure in Korea have become very cheap." Currently, this round of the rebound is driven by a combination of reduced positions, lowered valuations, and improved market sentiment. "This brings back the same old lesson as the Long-Term Capital Management incident," said Amir Anvarzadeh, a stock strategist stationed in Japan at Asymmetric Advisors. "This is precisely Keynes's old saying: 'The market can stay irrational longer than you can stay solvent.'" After the fall of the AI prophet, the familiar feeling surrounding the AI computing frenzy finally returns? The margin system effectively eliminated high-leverage buyers unable to continue financing. When funds held highly concentrated positions in SK Hynix, storage, computing infrastructure, and other AI assets, the decline in stocks would reduce the value of collateral, prompting lenders to require cash topping up or additional collateral. To meet margin calls, funds had to continue selling the same assets, forming a negative convexity cycle of "downadd marginsellfurther decline." After Citadel acquired most of the public stock portfolio at a discount, the market no longer had to endure repeated sell-offs by the fund on the exchange, and other investors no longer had to worry about unknown large-scale forced liquidation orders, leading to a violent rebound fostered by short covering, dealer hedging adjustments, and fundamental capital inflows. The underlying strategy of Situational Awareness essentially expressed a long-term judgment that might be correct but poses extreme short-term risks through high leverage: AGI and agents will drive global computing demand to expand exponentially, thus concentrating on holding semiconductors, storage, data centers, power, and private AI model companies while amplifying returns through financing. Public reports confirm that Situational Awareness used extensive leverage and faced margin calls from lenders, but specific contract combinations have yet to be fully disclosed, so it cannot be asserted that all positions were built through total return swaps. Generally, in the extreme leverage system of a Total Return Swap (TRS), the fund only needs to pay a portion of the initial margin to the prime broker to obtain stock or stock basket returns far exceeding the principal; the fund gains upside returns and pays financing interest but must bear the entirety of the downside losses. Prime brokers typically buy corresponding stocks for delta hedging; when prices fall and the fund cannot meet margin calls, the bank will terminate the swap, sell the hedged stocks, or dispose of collateral, turning paper losses into actual market sell-offs. From the perspective of Wall Street's major banks, as this round of forced de-leveraging comes to a close, signs of a new super bull market theme centered around AI computing have begun to re-emerge, but it cannot yet be declared that the upward leg has received complete confirmation on the funding side. JPMorgan strategist Mixo Das's latest predictions indicate that the liquidation process of Korea's related leveraged ETFs has likely been completed, especially as hedge fund institutions have completed about 90% of their de-leveraging, suggesting that the "irrational sellers" causing the continuous stampede have nearly exhausted their resources; this concurs with the event in which Citadel absorbed most of Situational Awareness's approximate $16 billion public stock portfoliothe persistent forced selling positions impacting the market have been transferred in one fell swoop, halting the downward spiral of global AI assets. JPMorgan's research shows that assets in Korea's relevant leveraged ETFs have dropped from a peak of about $50 billion to $17 billion, and the long-short leverage ratio of hedge funds has reduced from 5.7 times to 3.2 times; these figures suggest that the negative feedback from forced sales, reduced financing swaps, and the simultaneous liquidation of momentum strategies are exhausting. The Korean stock market has indeed encountered highly attractive crisis prices in terms of valuation, but a five-times forward P/E ratio cannot alone prove an absolute bottom. The storage industry is highly cyclical, and when profits are high, forward P/E ratios are naturally low; historically, the "cheapest P/E ratio" sometimes corresponds closely to profits near peak levels. The industry's fundamentals are providing more lasting fuel for this round of the semiconductor rebound than just short covering. Microsoft's latest quarterly Azure revenue growth of 43%, surpassing the market expectation of about 39.98%, shows that AI capital expenditures have started to convert into cloud revenue and cash flow; Amazon's AWS revenue grew by 37% to $42.2 billion, significantly exceeding market expectations, with order backlogs jumping from $364 billion to $496 billion, and management indicating that most computing capacity has already been booked by customers for 2027. Even if capital expenditures for 2026 are raised to $220 billion, supply cannot fully meet demand. Lam Research's next quarter revenue guidance has a median of $8.1 billion, clearly higher than the market expectation of $7.09 billion, proving that AI demand is spreading along the GPU to HBM, DRAM, NAND, advanced packaging, etching deposition, and enterprise-grade SSDs. To genuinely confirm the trajectory of the semiconductor upward leg, major semiconductor barometer indices need to avoid breaking key technical levels during re-tests and corrections, while leveraged ETF funds in Korea must stop the continuous outflow, and Microsoft, Amazon, and other cloud vendors must continue to demonstrate that capital expenditures can convert into cloud revenue, order backlogs, and acceptable asset recovery periods. JPMorgan states that what truly supports the long-term bullish logic for Korea's stock market and AI computing-related semiconductor stocks is the nearly endless continuous expansion of AI data centers for HBM, server DRAM, enterprise-grade SSDs, and advanced storage, combined with supply discipline maintaining upward support for spot and contract prices. The latest earnings from American cloud computing giants and tech leaders like Amazon, Google, and Microsoft have alleviated concerns over the slowdown in AI capital expenditures, sending the KOSPI to a record rise of 17.91% on July 31, with Samsung Electronics and SK Hynix rising approximately 28% and 30%, respectively; this indicates that the rebound comes not only from short covering but also from funds reconfirming that AI capital expenditures are expected to continue converting into cloud revenue, storage orders, and chip profits, prompting a reevaluation of the prosperous fundamentals of AI.