When Wall Street Says Sell, Check Who’s Waiting To Buy
Submitted by QTR's Fringe Finance
Today let me offer up one of my patented periodic reminders to do your own work.
As many have already pointed out, there was something almost too neat about Citadel’s timing before the Situational Awareness blowup. In late June, Citadel Securities published a market-structure review warning that U.S. equities had become unusually concentrated, that investors were increasingly expressing bullishness through leverage, and that leveraged exposure was piling particularly aggressively into technology and semiconductors. They also warned of a rate hike possibility.
Leveraged ETF assets had reached roughly $218 billion; semiconductor exposure in those products was up 175% since the end of March. Financing was getting more expensive too. It was not a prophecy about one hedge fund, but it was a pretty good description of the tinder.
Then July supplied the match. Situational Awareness, the spectacularly successful AI fund run by Leopold Aschenbrenner, got caught in the semiconductor selloff with a leveraged and concentrated book. Its portfolio fell 67% in July. Margin pressure followed, most of the public-equity portfolio had to go, and the fund that had looked like a genius machine suddenly discovered one of finance’s oldest technological breakthroughs: the margin call. Aschenbrenner did what, in my opinion, all market cowards unable to accept responsibility do: blamed short sellers. (Read: Leopold Aschenbrenner’s Short Seller Fairy Tale)
The interesting bit is who showed up with a checkbook after. Citadel, Ken Griffin’s hedge fund, bought most of Situational Awareness’s roughly $16 billion public-equity portfolio. Some positions were acquired at discounts of more than 10%. Within weeks Citadel had already eliminated more than 80% of the aggregate risk it had taken on, including through nearly 100 block trades worth more than $4 billion. Citadel gained roughly 6% in July while quite a few AI tourists were discovering the difference between conviction and collateral.
To be precise, Citadel Securities and Citadel the hedge fund are separate businesses. There is no evidence that Citadel Securities issued its market-structure warnings because Citadel wanted Situational Awareness’s assets on the cheap. That would be a much more exciting story, unfortunately requiring the minor inconvenience of evidence.
But it’s definitely worth…noting. And that’s what this piece is about. You don’t need a conspiracy theory to notice the lesson. Citadel Securities warned that a particular market structure was fragile. That structure cracked. Forced sellers appeared. Citadel then had the balance sheet and trading machinery to buy what those sellers could no longer hold. The warning and the purchase did not appear to be contradictory. They looked to me to be two different moments in the same trade. But there’s no evidence of that.
Still, that makes it worth remembering now that Citadel Securities is warning about the Treasury market. Its latest note attacks Scott Bessent’s expanded buybacks of long-dated Treasury securities, describing them as “financial repression at the margin.” The argument is that Treasury is trying to lean against long-term yields without addressing the reasons those yields are high in the first place: deficits, inflationary pressure and an economy already running hot enough to make additional easing questionable. But coming from Citadel...(READ THIS FULL ARTICLE HERE).