An AI hedge fund nearly broke apart. Situational Awareness, led by Leopold Aschenbrenner, is now under investigation by the SEC after steep losses forced it to sell every public stock position. The fund has not been accused of wrongdoing, but the regulator has sent subpoenas to major Wall Street banks tied to its trading and funding.
The SEC sent those subpoenas on August 24, 2026. They target banks that supervised Situational Awareness’s trading and channeled funding to support the fund, while the regulator also warned them to preserve information about the hedge fund.
That turns a failed AI investment trade into a broader examination of the machinery around it. Banks did not just watch the fund trade; their trading and prime brokerage teams cooperated with Citadel when it purchased assets from Situational Awareness. Finance has always enjoyed calling leverage sophisticated until someone asks where the records are.
A Forced Sale Ends the AI Trade’s Winning Streak
Situational Awareness built positions around a strong belief that AI would fundamentally reshape the world and the economy. The fund also held short positions in some software companies, creating a portfolio designed around a sweeping view of how the technology would change markets.
That view ran into the market in June and July. The AI trade faltered, causing losses for the fund, while stocks such as Sandisk and Bloom Energy—companies in which Situational Awareness held large stakes—tumbled more than 50% during those two months.
On July 29, Citadel entered discussions to acquire some of Situational Awareness’s holdings. The next day, July 30, Situational Awareness was forced to sell all of its public stock positions, and Citadel became the buyer of the assets sold by the fund.
The sale marked a bottom for the sell-off that began in June. That detail matters because the forced disposal did not happen in isolation: it became the point at which the AI-related decline stopped worsening for the positions involved, at least within the facts known about this episode.
Citadel Cuts Most of the Inherited Risk
Citadel did not simply sit on the portfolio it acquired. The hedge fund conducted more than 100 block trades with a combined market value above $4 billion to unwind risk from those assets.
More than 80% of the risk from the purchased portfolio has now been unwound. The scale of the trading shows how quickly a large portfolio can change hands when banks’ trading and prime brokerage teams coordinate the transfer—a process that sounds neat in a transaction summary and less neat when viewed as a forced sale.
Ken Griffin, Citadel’s founder and CEO, credited the teams involved in the transfer. “I am grateful for the focused effort they brought to the rapid transfer of the portfolio,” Griffin said.
The risk reduction also came as Citadel’s flagship multistrategy Wellington fund ended July up 5.94%. That return sits beside the turmoil surrounding Situational Awareness, but the two figures describe different things: Wellington’s July performance and Citadel’s decision to unwind more than 80% of the risk attached to the purchased assets.
The sequence now stands in clear order: the AI trade faltered in June and July, Situational Awareness sold its public stock positions on July 30, Citadel moved to unwind the acquired risk, and the SEC subpoenaed banks on August 24. The regulator’s focus is not an accusation against Situational Awareness; it is a demand for information about the fund’s trading, funding, and the banks that supported it.
For Citadel, the episode is defined by a fast portfolio transfer and more than 100 block trades. For Situational Awareness, it is the collapse of a star AI hedge fund built around a world-changing thesis. The thesis may still shape markets. This fund did not survive the timing.
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