S3: Crowded, Leveraged AI Bets Sank Situational Awareness

S3 Partners, an analytics firm, reported that steep losses at AI-focused hedge fund Situational Awareness were driven by concentrated, leveraged positions in crowded AI trades rather than by coordinated short selling. The firm reviewed short interest across the fund’s largest holdings and found mixed patterns.

Short interest rose sharply in some names and fell in others. T1 Energy and Iren recorded the biggest increases this year, with shares sold short up about 122% and 98%, respectively. Short interest fell roughly 10% in Sandisk and about 7% in Applied Digital.

Several of the fund’s holdings, including CoreWeave and Core Scientific, had outstanding convertible bonds. Those securities attracted convertible-arbitrage strategies, which typically buy the convertible debt and short the underlying stock to hedge the position.

S3 Partners estimated that roughly 30% to 40% of short interest in CoreWeave and Core Scientific reflected hedging tied to convertible positions rather than outright bearish bets. Short interest in both companies rose into the summer and then retreated as their share prices weakened. CoreWeave’s short positioning has dropped by about two-thirds from its June peak, and short interest in Core Scientific has returned to earlier levels.

The fund sold most of its public equity holdings in a large block transaction, with Citadel acquiring a substantial portion. Situational Awareness was founded by AI researcher Leopold Aschenbrenner and faced pressure after a broad sell-off in AI stocks reduced demand for elevated sector valuations.

S3 Partners’ analysis included the line: “There is no evidence of widespread ‘predatory trading’ targeting the fund’s portfolio.” The firm attributed the losses to heavy concentration, crowded positioning and significant leverage that left the portfolio exposed when sentiment toward AI-related equities weakened.