Hedge Funds and Crypto Derivatives Liquidated Amid Volatility in SK hynix and Other AI Stocks

Liquidity Crisis Hits New Hedge Fund

Hundreds of Billions in On-Chain Perpetual Futures Liquidated

The stock prices of artificial intelligence (AI)-related shares, including SK hynix, experienced sharp swings, sending ripples through Wall Street. When one share of SK hynix hit the lower limit in the domestic pre-market, several hundred billion won worth of overseas virtual asset derivative long (buy) positions were forcibly liquidated.

According to U.S. financial media outlet CNBC on July 30 (local time), the fledgling hedge fund 'Situational Awareness'—which specializes in investing in AI-related stocks—has recently faced a liquidity crisis after its holdings plummeted in value. While AI infrastructure assets such as SK hynix declined, short positions in software companies like Adobe sharply increased in price. This resulted in double losses and triggered margin calls (requests for additional collateral).

This emerging fund, founded by Leopold Aschenbrenner, a 25-year-old former OpenAI researcher, managed around $45 billion in assets as of early July and was known as a major holder of SK hynix ADRs. According to the UK’s Financial Times (FT), Situational Awareness, along with other hedge funds such as Baillie Gifford and Coatue Management, had earlier expressed interest in investing up to $7 billion (approximately 998 billion won) during the SK hynix ADR initial public offering (IPO).

However, Situational Awareness is reportedly likely to avoid ultimate collapse as Citadel—led by hedge fund industry giant Ken Griffin—stepped in as a rescuer. FT noted that the acquisition size—about $16 billion (approximately 2.28 trillion won)—represents the largest emergency block trade (off-hours bulk sale) in Wall Street’s history. It is also reported that Situational Awareness will continue operating as an investment company, retaining about $5 billion (approximately 713 billion won) in unlisted assets such as Anthropic.

The volatility in SK hynix stock also affected the virtual asset derivatives market. On the morning of July 28, as soon as the NXT pre-market opened at 8 a.m., a share of SK hynix was executed at 1,272,000 won, down 29.99% from the previous closing price. As new buy orders flowed in, the stock price quickly rebounded to the 1.7 million won range. The problem was that Trade.xyz, which operated and distributed perpetual futures linked to SK hynix stock on the decentralized crypto exchange 'Hyperliquid,' was referencing NXT execution prices in real-time. The distributor calculated the price by converting the domestic won-denominated stock price into U.S. dollars using the won-dollar exchange rate. The distributor's oracle regarded the single 1.27 million won transaction on NXT as the valid market price in Korea, applied the exchange rate, and the futures index briefly plunged from $1,127.9 to $917—a 17.9% drop. As a result, long positions worth $57.4 million (about 8.27 billion won) were forcibly liquidated in just two minutes.

According to blockchain data provider Earlyum, more than 900 users are estimated to have realized actual losses amounting to $17.4 million. The distributor stated that while the system itself operated as designed, it would compensate users for liquidation losses caused by this abnormal event. The company added, "Moving forward, we will enhance our oracle to better respond to such extreme tail events."

Industry experts assess that this incident resulted from a combination of the distributor’s oracle and the unique structure of the NXT pre-market. First, the distributor's oracle directly reflected illiquid pre-market prices in the index without verifying trading volume or amount. There was a mechanism to limit price drops to a maximum of 1% per update from the previous price to prevent liquidation, but the issue was that the oracle was designed to update prices very rapidly—every three seconds. After the lower limit was hit in the spot market, sequential 1% drops occurred every three seconds. While the oracle did not fully follow the spot lower limit, the three-second price decreases accumulated, leading to a 17.9% futures price drop and mass forced liquidations.

Park Sungje, a researcher at Shinhan Investment & Securities, commented, "The current price limit system serves to slow the shock, but it does not block erroneous prices from being reflected. To judge whether a single execution price is the normal market price, not just the price but also trading volume, trading amount, and order book depth must be checked. Rather than applying the same oracle system used for crypto assets directly to stocks, the market’s structure and trading hours should be considered for a tailored design." He further added that it is necessary to apply minimum execution size and minimum trading amount criteria, and to reflect differences in liquidity by trading session, so that the pre-market price reflection limit is set lower than that for the regular session.

The trading mechanism of the NXT pre-market was also seen as a factor in this incident. In the regular market, high trading volume and volatility-mitigation mechanisms ensure that abnormal trades (fat finger errors) are diluted and not directly reflected in the price index. In contrast, in the NXT pre-market, call auction trading begins as soon as it opens. If a market order is placed when there are insufficient orders, even a single share can be executed at a price near the lower limit. NXT is planning to introduce a volatility mitigation mechanism (static VI) in September. If a price changes by more than 10% compared to the previous close or reference price, single-price auction trading will be enforced for two minutes. After the new mechanism is introduced, if the provisional execution price at opening deviates significantly from the reference price, trades will not be carried out immediately, but rather orders will be collected to determine a new equilibrium price. Researcher Park said, "This is a measure that can reduce the possibility of lower-limit executions for a single share."

This content was produced with the assistance of AI translation services.