Citadel buys most of Situational's stock holdings after AI share rout, sources say

Global hedge funds are grappling with their biggest monthly drawdown on record as AI stocks have been routed across the board, erasing much of the gains from crowded bets in the sector. Asia-focused fundamental long-short funds are down 18.6% on average this month through July 28, Goldman Sachs said in a prime brokerage note sent to clients this week.

Stock-picking hedge funds have been rushing to unwind their positions in AI names, as they covered short positions and sold long positions in relatively equal amounts, according to a note from Morgan Stanley's prime brokerage unit sent to clients on Wednesday.

Hedge funds typically take on large amounts of leverage from lenders to take bigger swings at the markets in order to amplify their returns. However, such leveraged bets can backfire when the markets move against positions taken by funds, forcing margin calls from prime brokers. That can result in a vicious cycle, where the margin calls trigger sales, extending market downturns that beget more selling.