Wall Street Lunch: AI-Focused Hedge Fund Offloads $16B Equity Portfolio To Citadel Amid AI Stock Slump

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This is an abridged transcript of the podcast:

Our top story so far, Situational Awareness, the AI-focused hedge fund founded by former OpenAI researcher Leopold Aschenbrenner, has sold a large portion of its stock portfolio to Ken Griffin’s Citadel after suffering steep losses.

Reports say the hedge fund rapidly unloaded much of its roughly $16B public equity portfolio after taking heavy losses tied to concentrated AI-related positions.

The fund’s holdings included South Korean chipmaker SK Hynix (SKHY) and other stocks caught up in the broader retreat from AI-related shares.

Situational is expected to continue operating, however, retaining significant private-company investments, including an Anthropic stake valued at about $5B.

The fund had grown rapidly over the past several months and generated a 439% return from the start of the year through the end of June, according to an investor letter. It was also said to have been using substantial leverage.

Founded about two years ago, Situational Awareness amassed more than $20B in assets under management, according to the Financial Times. Aschenbrenner became a prominent figure in Silicon Valley after publishing his 2024 essay Situational Awareness, which argued that artificial intelligence would dramatically reshape society.

Situational Awareness’ largest disclosed holdings at the end of the first quarter included Nebius Group (NBIS), Sandisk (SNDK), Micron (MU) and CoreWeave (CRWV).

In a twist, all four stocks are rallying sharply today, with Sandisk, Nebius and CoreWeave up more than 20%, while Micron is higher by about 15%.

Among other active stocks, Arm (ARM) is rallying after posting solid Q1 results and issuing upbeat guidance.

J.P. Morgan analyst Harlan Sur said the “AGI merchant silicon CPU narrative continues to firm up just a few months after the Arm Everywhere event.”

Fair Isaac (FICO) is tumbling after Q3 revenue missed consensus estimates.

CEO William Lansing said: “Elevated interest rates and ongoing affordability challenges continue to weigh on the mortgage market, keeping loan originations below historical norms.”

Electronic fixed-income trading platform MarketAxess (MKTX) is surging after agreeing to a buyout offer from Intercontinental Exchange (ICE) at a 33% premium to its previous closing price.

And Jersey Mike’s Subs (JMKE) opened, how to put this… sub its IPO price. The stock debuted at $21 after pricing at $23, right in the middle of its expected range.

Looking to the economy, Q2 GDP rose at a 1.5% annual rate, according to the initial estimate. That was well below the 2.3% consensus and down from 2.1% in Q1.

Growth in consumer spending, investment and exports was partly offset by a decline in government spending. Imports, which are subtracted from GDP, also increased during the quarter.

Olu Sonola, head of U.S. economics at Fitch Ratings, said: “AI investment remains a powerful growth story, but the import surge underpinning the buildout is a reminder that an AI boom does not automatically translate into an equally large boost to US GDP.”

Meanwhile, the June core PCE price index rose 0.1%, a touch below the 0.2% consensus. The annual rate dipped to 3.3%, in line with forecasts.

Following the mixed data, the 30-year Treasury yield (US30Y) remained above 5.2%, a 17-year high reached shortly after Fed Chairman Kevin Warsh’s press conference on Wednesday.

Warsh said: “Market participants are learning to play the ball, not the referee.”

That echoes what former Bank of England Governor Mervyn King called the Maradona Effect, inspired by Diego Maradona’s two famous goals against England in the 1986 World Cup.

One was the Hand of God, a foul that succeeded because no one saw it. The other was a brilliant 60-yard run past five defenders, who all reacted to what they expected Maradona to do rather than what he actually did. King’s point was that when a central bank’s reaction function is fully credible, markets tighten or loosen financial conditions themselves. No vote required. That’s the good goal.

The question is which goal Warsh scored.

Economist Dario Perkins says Warsh is Maradona in the sense that he’s being cagey and getting away with it.

Warsh probably wants to be Maradona, Perkins said, but the risk is that things get Messi instead. Not the outlaw genius, but the player expected to deliver the trophy, on schedule and under constant scrutiny.