Did Ken Griffin Just Save the AI Trade With This $10 Billion Move?

Stocks soared on Thursday, led by a blockbuster earnings report by Microsoft, which finished the session up 15.5%. In fact, it was the single biggest one-day market-cap gain from a stock as Microsoft added more than $400 billion in market value.

But beneath that headline and the 2.8% gain in the Nasdaq Composite, there was arguably a bigger story in the market, driving a surge in AI stocks today.

Situational Awareness, the AI-focused hedge fund founded by 24-year-old Leopold Aschenbrenner, faced margin calls from its lenders yesterday and was forced to sell most of its public holdings to Ken Griffin’s Citadel, valued at more than $10 billion.

The news sent AI stocks soaring. The iShares Semiconductor ETF(NASDAQ:SOXX), which holds many of the top AI stocks, jumped a whopping 8.5%, retracing its losses from prior weeks after being down 29% from its peak at the end of June.

Citadel’s purchase marked something of an about-face for Griffin, who had not long ago dismissed AI technology, even calling some of it “garbage.”

However, after bailing out Situational Awareness at a deep discount, Griffin has become one of the biggest holders of AI stocks.

Let’s discuss what the blowup and Griffin’s move mean for investors, but first, a quick review.

What happened to Situational Awareness

Leopold Aschenbrenner’s Situational Awareness hedge fund had been one of the biggest winners in the AI boom, but the firm was highly leveraged, and the plunge in AI stocks in July put it in a tough spot. By Wednesday night, Situational Awareness was searching for another fund to buy its portfolio, and Griffin’s Citadel emerged as the winner of a bidding war.

On Thursday, as news broke of Citadel’s big move, investor confidence seemed to return to the AI sector as they interpreted the event as a bottom in the latest swing. Citadel’s move offloaded the risk in Situational Awareness, and sparked a relief rally on Wall Street as it removed a major seller, sending many of Situaional Awareness’s top holdings up more than 20%, including IREN, Sandisk, and CoreWeave.

Earlier reports that Situational Awareness had been under pressure had weighed on the AI sector. In fact, the SOXX ETF is still well below where it was at the start of the week. Through the first three sessions this week, the ETF had fallen 11.8%.

What it means for investors

The AI rally sparked on Thursday could continue over the coming days, as these stocks traded higher after hours as well. But the volatility in the sector is a reminder that AI stocks have become dominated by short-term traders and sentiment, and price action has become divorced from fundamentals.

That’s not surprising given the massive gains in some AI stocks, the transformative power of the technology, and the attention it gets in the market and the media, but that means long-term investors should be prepared for more such volatility.

It’s impossible to predict when a fund like Situational Awareness will blow up or when a turnaround like Thursday’s will take place.

What investors can do is buy quality stocks, especially when they go on sale. One example right now is Nvidia (NASDAQ:NVDA), which is still growing rapidly and trades at a forward P/E of just 22.

Rather than getting caught up in the daily movements and market sentiment that push AI stocks back and forth, investors should focus on fundamentals and buy when prices are attractive.

Image source: Getty Images.

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Jeremy Bowman has positions in CoreWeave and Nvidia. The Motley Fool has positions in and recommends Microsoft, Nvidia, and iShares Trust - iShares Semiconductor ETF. The Motley Fool has a disclosure policy.