Situational Flipping: Citadel Has Dumped Almost All Stocks Acquired From Aschenbrenner

 After the market learned in late July that Leopold Aschenbrenner's Situational Awareness hedge fund had blown up under too much Total Return Swap and option leverage (as we had warned a month earlier would happen), the next big question facing investors was: how long would Citadel keep the positions it bought from Leopold (at a huge market and transactional discount - recall Citadel only agreed to purchase the public book at a 10% discount off what was already a badly beaten down price), and would Ken Griffen prove to be as firm a believer in the AI theme as the prior, 24-some year old owner of stocks such as Bloom Energy, Sandisk, Micron, Taiwan Semi and Nebius.

We got the answer from Griffin himself earlier today when the Citadel CEO said in a letter to investors that Citadel has sold most, or more than 80%, of the portfolio it took on from buying the majority of Situational Awareness’s stock bets last month after the AI-focused hedge fund was nearly toppled by the recent tech sell-off.

“To date, we have successfully shed more than 80% of the aggregate risk from the original portfolio" Ken Griffin wrote in the letter that rushed to make it clear he has zero intentions of holding the extremely volatile memory and other chip stocks longer than was absolutely necessary. 

Griffin also said that he has "completed nearly 100 block trades totaling over $4b in market value ” adding that the trades included the “largest intraday block trades of the year.”

Why block trades? Because as Leopold's liquidation demonstrated, the only reason why his stocks exploded as high as they did, is because they are abysmally illiquid and Situational Awareness - with the help of lots of leverage - ended up being the only size buyer of his own stocks! Of course, we all saw what happened when it then flipped to size seller, much to Ken Griffin's delight.”

“Over our nearly thirty-six-year history, we have prided ourselves on being front-footed and proactive during periods of market dislocation,” Griffin wrote in the letter.

Said otherwise, after making several billions dollar in profit on Leopold's momentum darling liquidation, Citadel is now almost fully out, and has largely closed the trade, leaving other momo chasers to re-engage with what Griffin clearly did not view as "value stocks."

“A transaction of this magnitude could not have been completed without the extraordinary cooperation of the trading and prime brokerage teams at the banks serving both firms,” Griffin wrote in the Friday letter to clients. “I am grateful for the focused effort they brought to the rapid transfer of the portfolio.

Citadel’s Wellington fund finished up the month 5.94%, YTD up 12%, with half of the YTD upside thanks to Leopold's distressed liquidation. Most of Citadel's rivals lost money in July.

Citadel’s sudden, last minute swoop for the Situational Awareness stock portfolio marked one of the largest rescue deals in Wall Street history, and a dramatic episode in a rollercoaster period for equities as investors rushed into stocks linked to AI before being gripped by anxiety that the boom in the sector was overblown, as the FT put it. The weeks-long sell-off of tech stocks in July spurred widespread pain on Wall Street. Situational Awareness, the hedge fund run by 24-year-old OpenAI alumnus Leopold Aschenbrenner, emerged as its biggest casualty.

Aschenbrenner, who was fired by OpenAI, boasted extensive connections in Silicon Valley and was hailed by some as a prodigy and the “Nostradamus of AI”.

As he faced losses in July’s sell-off, Aschenbrenner first tried to raise additional funds through individual asset sales, but then pivoted to selling the majority of his stock holdings to Griffin’s firm in a deal that was pulled together in just 24 hours.

Citadel purchased the positions at a roughly 10 per cent discount, the FT has previously reported, betting that it could afford to hold the stocks until the market steadied. Shares of Situational Awareness’s biggest holdings, including chipmakers Sandisk and Micron, quickly recovered, giving Griffin a window to turn a rapid profit.

Griffin's rescue was also a self-fulfilling prophecy. Griffin’s agreement to buy Aschenbrenner’s stock book stymied fears of more forced selling on Wall Street, which helped to boost share prices across the tech industry. Ironically, the very same boost that was sparked by confidence that the selling was now over, is what allowed Griffin to quietly unwind the same stocks he had acquired, for billions in profit.

Griffin rarely writes letters to investors. His message this week was a testament to the extraordinary nature of the rapid deal he cut with Situational Awareness last month.

“Over our nearly thirty-six-year history, we have prided ourselves on being front-footed and proactive during periods of market dislocation,” Griffin wrote. The firm’s flagship fund was up 6 per cent in July, while many of its rivals lost money or were relatively flat.

“Only Citadel could have delivered a solution of this scale on this timeline,” he added.

https://www.zerohedge.com/markets/situational-flipping-citadel-has-dumped-almost-all-stocks-it-acquired-leopold-aschenbrenner