In July, AI stocks experienced a sharp correction, with a high-leverage AI fund, once a star performer, suffering a 67% monthly loss and being forced to sell its positions at a discount to Citadel Securities. JPMorgan warned that after the wave of liquidations, institutional capacity to absorb AI assets has significantly declined, leaving retail investors as the only potential support for future market movements.
The AI trading boom is facing a severe test. In July, as AI-related stocks experienced a significant correction, several prominent hedge funds incurred substantial losses. Among them, the highly leveraged AI fund Situational Awareness was forced to sell a large portion of its stock portfolio at a steep discount to Citadel due to margin call pressures.
The Situational Awareness Fund plummeted 67% in July, becoming one of the most severely affected cases in this AI trading reversal. Due to the rapid decline in semiconductor and technology stocks, the fund was forced to liquidate a large portion of its public market holdings to meet margin requirements. Meanwhile, the market began reassessing the sustainability of tech giants’ ongoing investments in AI infrastructure, further pressuring related stocks.
This adjustment marks a clear reversal in AI and technology trades that have performed strongly over the past several years.
According to data from research firm PivotalPath, the hedge fund index tracking technology, media, and telecommunications (TMT) stocks fell 10% in July, recording the largest single-month decline among all strategies tracked by the firm. This figure does not even include the forced liquidations of Situational Awareness, suggesting that other tech funds likely experienced similar passive reductions in their positions in semiconductor and memory chip stocks.
Jon Caplis, founder of PivotalPath, said that as of June this year, the annualized return on such trades over the past three years was approximately 25%, but in July, market conditions suddenly reversed, causing severe losses for all related strategies. “When these trends reverse so rapidly, differences in risk management among fund managers quickly become apparent.”
Multiple AI-themed funds have suffered significant losses as a result.
Whale Rock Capital’s flagship fund, focused on technology investments, fell 21.7% in July, erasing about half of its gains this year; Altimeter Capital’s AI-focused fund declined 11%. However, due to strong AI market performance in the first half of the year, both funds still achieved year-to-date returns of 35.1% and 34%, respectively.
Losses in other tech funds have been relatively limited. Tiger Global Management’s long-short fund fell 4.8% in July, bringing its year-to-date return to 9.4%; its cross-over fund investing in both private and public companies declined 2.7% in July but is still up 18.9% for the year.
In contrast, Viking Global Investors, with lower AI exposure, performed more steadily, declining only 0.2% in July and rising 2.5% year-to-date.
Multi-strategy giants have also been affected. Millennium Management fell 2.1% in July, with its year-to-date return reduced to 8.2%; Balyasny Asset Management declined 1.5%, bringing its year-to-date return down to 1.2%; Verition Fund Management dropped 1.1%, lowering its year-to-date return to 4.5%.
However, market volatility has also created new winners.
Castle Investment, known for snapping up distressed assets at a discount, seized the opportunity to purchase a large stake in Situational Awareness at approximately a 10% discount. This transaction helped Castle’s flagship fund rise 5.9% in July, bringing its year-to-date return to 12%, making it one of the few beneficiaries amid the AI sell-off.
Situational Awareness has re-entered the investment market. According to informed sources, the fund invested another $400 million this week in an unlisted company, though the specific target has not been disclosed.
AI trading may enter a more vulnerable phase
JPMorgan believes that the sharp correction in July could reshape the future structure of AI trading.
In July, the semiconductor sector, which had previously driven the AI market rally, faced a sharp correction. The Philadelphia Semiconductor Index (SOX) plunged 21% for the month, marking one of its worst performances since 2008. Investors are now beginning to question whether the hundreds of billions of dollars being continuously invested in AI infrastructure will ultimately generate sufficient returns.
JPMorgan Chase CEO Jamie Dimon said that market leverage, including prime brokerage, hedge funds, exchange-traded funds, and treasury arbitrage, is at high levels.
“The market leverage is quite high,” Dimon said in an interview with CNBC on Wednesday. “When this happens, the likelihood of rapid market turbulence increases, and people become unsettled.”
JPMorgan strategist Nikolaos Panigirtzoglou believes that, following this loss, hedge funds may strengthen risk controls and raise position limits, thereby reducing their ability to hold highly volatile tech stocks over the long term. Meanwhile, prime brokers may also reduce the financing available to such strategies.
Panigirtzoglou warned that if institutional capital's ability to support AI-driven trading declines over the long term, the tech stock rally could become increasingly reliant on retail investors.
Tech trading may increasingly rely on retail capital in the future, making it more susceptible to fluctuations from leveraged ETFs, retail options trading, and margin accounts.
This means that the next phase of AI market dynamics may no longer be solely a competition among institutional investors, but rather depend more on whether retail capital can continue to absorb high-valued tech assets. As the market shifts from chasing AI growth narratives to examining actual profitability, the most crowded trades of the past few years are entering a new stress test.