Citadel has sold 80% of the "bloody chips" it bought at the bottom from the "AI stock god"!

Citadel founder Ken Griffin disclosed to clients that the firm has significantly reduced its risk exposure from the asset portfolio acquired from hedge fund Situational Awareness, while also confirming that its flagship fund performed strongly in July. According to CNBC, Griffin stated in a letter to clients on Friday that Citadel has reduced the overall risk exposure of the stock portfolio acquired from Situational Awareness by over 80%, involving a transaction size exceeding $4 billion. The positions are primarily concentrated in the AI and semiconductor sectors, including core long positions in Micron Technology and SanDisk, along with related positions in Nvidia, Broadcom, and AMD. In the letter, Griffin also confirmed that its flagship multi-strategy fund Wellington achieved a return of 5.94% in July, marking its best monthly performance since 2022. The Financial Times reported that Citadel executed a large-scale sell-off of these holdings in just a few weeks, suggesting that with the rapid rebound in tech stocks, the firm likely secured substantial trading gains. Citadel's involvement with Situational Awareness coincided with significant turmoil in AI-related trades. Following this, there was a rebound in the AI sector, and the market generally believes that the forced liquidation of Situational Awareness signaled a temporary bottom in the selling that began in June. Citadels swift acquisition led to an 80% reduction in exposure within weeks. On July 29, Citadel started negotiations with Situational Awareness; by the next day, the deal was completed. Citadel acquired most of the latters publicly traded stock positions at about a 10% discount, with the transaction size exceeding $4 billion. Subsequently, Citadel did not hold these assets long-term but quickly reduced risk exposure through block trades. Griffin indicated that the firm completed over 100 block trades, reducing the overall risk exposure of this stock portfolio by more than 80%. This transaction coincided with a rebound in AI and chip stocks from prior concentrated selling. After Citadel's acquisition, market concerns about further forced selling eased, leading to a rebound in related stocks, which also created a window for a quick exit. Notably, the Wellington fund recorded only a 0.45% increase just before the trading activity in the last week of July, ultimately ending the month with a 5.94% return. Although Griffin did not disclose the specific profits from this transaction, considering the acquisition at a discount followed by a rapid reduction during the market rebound, it is likely that Citadel achieved significant trading gains. Uncontrolled concentration in AI positions forced Situational Awareness to exit positions. Situational Awareness was founded by former OpenAI researcher Leopold Aschenbrenner and swiftly accumulated over $20 billion in assets in about two years. The fund was heavily invested in AI themes while shorting some software stocks, attempting to bet on AI reshaping the industry landscape. However, between June and July, the AI trade abruptly reversed, putting pressure on both long and short positions of the fund. Regulatory filings showed that in the second quarter, Situational Awareness significantly increased its holdings in Micron Technology and SanDisk, which together accounted for about $11 billion, nearly a quarter of the net asset value at the time. At the same time, the fund reduced its short positions in Nvidia, Broadcom, and AMD options, further amplifying its net long exposure in the semiconductor sector. Following this, Micron's stock fell by 29%, and SanDisk dropped by 47%. The highly concentrated AI positions combined with leverage exposed the portfolio's risks rapidly, triggering margin calls and forced liquidations. Initial attempts by Aschenbrenner to raise funds by selling assets one by one failed as losses widened, eventually leading to the decision to sell off a majority of asset positions in the public market, making Citadel the primary buyer. This is not the first time Citadel has stepped in as a buyer. Griffin emphasized in his client letter that Citadel has been adept at taking proactive measures during periods of market disarray for nearly 36 years. This is not Citadel's first acquisition of distressed hedge fund assets. In 2006, Citadel acquired the entire trading portfolio of Amaranth Advisors after a blow-up due to natural gas trades from JPMorgan. In 2007, Citadel also took over the credit assets of Sowood Capital Management after its collapse. However, unlike those hedge funds that ultimately exited the market, Situational Awareness did not completely disappear due to this emergency sale. The fund still retains private market equity, including stakes in Anthropic, as well as a small number of publicly traded stocks. Earlier this month, Aschenbrenner communicated to investors that despite the recent turbulence, Situational Awareness has risen by about 80% year-to-date; the fund previously revealed that its returns exceeded 400% in the first six months of this year. In retrospect, this crisis was not merely a case of misjudging AI, but rather a combination of a highly concentrated long position in AI, weakened hedged positions, and leverage, which together transformed into a liquidity crisis when the market reversed rapidly. For Citadel, this crisis presented an opportunity to buy at a discount and exit quickly as the rebound occurred. This article was sourced from "Wall Street Watch," authored by Yang Chen and Li Jia, edited by Li Cheng.