Data Shows: 'AI Stock God' Was Not Defeated by Bears, But 'Self-Inflicted'

This collapse was not caused by a bear attack, but rather by a triple combination of extreme concentration, extreme crowding, and extreme leverage.

Written by: Zhao Ying, Wall Street Journal

Leopold Aschenbrenner, a former researcher at OpenAI and founder of the hedge fund Situational Awareness, has recently faced significant losses, forcing the fund to sell stocks at a discount. However, data indicates that the root cause of this collapse was not a deliberate bear attack, but rather the fund's own highly concentrated, crowded, and leveraged position structure that created hidden risks.

According to a report by Bloomberg on Tuesday, Bob Sloan, founder of the short-selling data analysis firm S3 Partners, stated in an interview that S3's data did not find any coordinated short-selling behavior targeting the fund's heavily weighted stocks, nor was there any significant evidence of 'predatory trading' patterns.

The sharp decline in AI-related stocks has raised doubts in the market about the sustainability of high valuations in this sector, putting pressure on Situational Awareness, which ultimately exited most of its public stock positions through a block trade, with Citadel, owned by Ken Griffin, acquiring a significant portion of those positions.

The warning for the market from this incident is that in a highly euphoric AI market, extreme concentration in heavy bets combined with high leverage inherently creates significant fragility. Even without external forces actively suppressing prices, normal market fluctuations can trigger a chain of forced liquidations.

Short Data: No Evidence of 'Hunting'

S3 Partners' data shows that among the top ten holdings of Situational Awareness, about half of the short interest remained flat or even decreased, which does not support claims of coordinated short-selling pressure from bears.

According to Bloomberg, Bob Sloan bluntly stated in the interview: 'Let’s be clear, these are super concentrated, super crowded positions, and they are also super leveraged. This is a textbook case of a bubble; he just got caught up in it.'

From the perspective of specific holdings, S3 data shows that the stocks with the largest increase in short interest this year to date are T1 Energy Inc. and Iren Ltd., which rose by 122% and 98%, respectively; while Sandisk Corp. and Applied Digital Corp. saw their short interest decrease by 10% and 7%, respectively. This divergent trend further indicates that there is no targeted short-selling assault on the fund's overall holdings.

Convertible Bond Arbitrage: Some 'Shorting' is Actually Hedging

Bob Sloan also pointed out that some of the fund's major holdings—such as CoreWeave Inc. and Core Scientific Inc.—have outstanding convertible bonds in circulation, a characteristic that naturally attracts hedge funds deploying convertible bond arbitrage strategies. The logic of this strategy is to buy bonds while simultaneously shorting stocks, essentially hedging volatility rather than betting on further declines in stock prices.

'30% to 40% of the shorting in these names is actually hedging, engaging in volatility trading,' Sloan stated, rather than directional bearish bets.

S3 data corroborates this assessment: short interest in CoreWeave and Core Scientific continued to accumulate before the summer, but as stock prices fell, shorts quickly retreated. CoreWeave's short positions have been reduced by two-thirds from their peak in June, while Core Scientific's shorts have almost completely unwound—this pattern aligns closely with the typical behavior of convertible bond arbitrage hedges closing positions as the underlying stock declines.

High Concentration, High Crowding, High Leverage: The True Root of the Collapse

Situational Awareness was founded by AI researcher Leopold Aschenbrenner, and the core logic of the fund is built on a highly bullish outlook for AI-related stocks. However, it is precisely this extremely concentrated position structure that left the fund with almost no buffer when the valuation of the AI sector came into question and stock prices plummeted.

Bob Sloan's statement hits the nail on the head: super concentration, super crowding, and super leverage, when combined, have made the fund itself an amplifier of market volatility. Once the market turns, the pressure to deleverage will far exceed any external bearish impact.

The fund ultimately completed an emergency self-rescue within 24 hours, exiting most of its public stock positions through block trades, with Citadel taking over a significant proportion of those positions. This hasty exit, rather than being defeated by bears, is more accurately described as an inevitable collapse of its own position structure under market pressure.

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