Jane Street took $15 billion hit in July tied to Situational Awareness, AI selloff, sources say

In a note to employees on Friday, executives at Jane Street said July was a “bad month” for ⁠the firm, blaming the drawdown at Situational for contributing to its poor performance during the month.

“We have an investment in Situational Awareness, an externally managed AI-focused hedge fund, that became large by performing well in the first half of the year. They had a large drawdown that left our stake about flat on the year, but still up over the entire period we have been invested,” according to the note to employees that was seen by Reuters.

“We generally worry most about sharp drawdowns, and buy puts that would help in those scenarios. The losses in AI stocks were relatively spread out throughout the month, so those short-term hedges provided little help,” the note added.

The firm also took a hit from its long positions in non-AI stocks in Asia, many of which had outperformed the markets earlier in the year.

“We largely lost on the same portfolio of trades that had strong outperformance in the second quarter. AI-exposed stocks were down a lot during July, several of the largest memory and semiconductor stocks were down around 50%,” Jane Street said in the note.

Jane Street did not respond to a request for comment.

‘MORE SELECTIVE ABOUT RISK’

The latest disclosures from Jane Street underscore ‌the extent of ⁠the steep losses that the selloff inflicted on Wall Street’s biggest financial firms. The July loss meant that the firm recorded its first negative month of trading revenue since 2016, while its revenue is down roughly 25% from its peak at the end of June, the firm said in the note.

Jane Street, which has about 3,500 employees and was launched in 2000, provides market liquidity by buying and selling a range of financial products, including ETFs, equities, bonds, options, commodities and currencies on exchanges and trading ⁠venues worldwide.

The firm, which to date has not taken on any outside capital, currently has direct market access to more than 200 trading venues across the globe. Jane Street’s capital structure allows the firm to take larger positions when providing liquidity and hold such positions through periods when such risks pay off.

Over the past few years, Jane Street has grown to become a market-making juggernaut, gaining an edge through real-time pricing tools that have ⁠been built over 25 years by leveraging data and research.

Still, Jane Street was not immune to the unwinding of the AI trade despite its dominance, as the July losses forced it to exit several of its riskiest positions in recent weeks — a fact that it acknowledged in its note to employees.

“Despite the large year to date increase in trading capital, the recency of these losses has caused ⁠us to locally be more selective about risk,” the note said.

Jane Street said it closed a significant portion of risk in the specific areas where the firm lost money in July, while also having pulled back on risk-taking in other strategies.

“Our positions currently seem appropriate for our present risk tolerance,” the note said. “Market volumes have been strong, and we’ve continued to make improvements to our short time horizon strategies, that trading seems more profitable than ever,” it added.