The sharp losses suffered by AI-focused hedge fund Situational Awareness were driven by concentrated, leveraged positions in crowded trades rather than a coordinated assault by short sellers, according to a report by Bloomberg citing analytics firm S3 Partners.
Bob Sloan, founder and managing partner of S3 Partners, said the firm’s short interest data showed no evidence of widespread “predatory trading” targeting the fund’s portfolio. Instead, short interest across its largest positions was mixed, with bearish bets rising in some stocks while remaining flat or declining in others.
Speaking to Bloomberg TV, Sloan said the fund’s difficulties stemmed from a combination of highly concentrated holdings, crowded positioning and significant leverage, leaving it particularly exposed when sentiment towards AI-related equities deteriorated.
S3’s analysis found that T1 Energy and Iren recorded the largest increases in short interest among the fund’s disclosed holdings this year, with shares sold short rising by 122% and 98%, respectively. By contrast, short interest in Sandisk and Applied Digital declined by 10% and 7%.
Situational Awareness, founded by AI researcher Leopold Aschenbrenner, came under severe pressure after a broad sell-off in AI stocks raised doubts over the sustainability of elevated sector valuations. The fund subsequently liquidated most of its public equity portfolio through a large block transaction, with Citadel acquiring a substantial portion of the positions.
Sloan also noted that several of the fund’s holdings, including CoreWeave and Core Scientific, have outstanding convertible bonds, making them popular with hedge funds running convertible arbitrage strategies. These trades typically involve purchasing the convertible debt while simultaneously shorting the underlying equity as a hedge.
As a result, he estimated that between 30% and 40% of the short interest in those companies reflected hedging activity rather than outright bearish bets.
According to S3’s data, short interest in both CoreWeave and Core Scientific increased steadily into the summer before retreating as their share prices weakened. CoreWeave’s short positioning has fallen by around two-thirds from its June peak, while short interest in Core Scientific has largely returned to previous levels, a pattern Sloan said is consistent with convertible arbitrage positions being unwound rather than aggressive speculative short selling.
