NEW YORK, July 31 (Reuters) - The portfolio value of Leopold Aschenbrenner's hedge fund, Situational Awareness, fell 67% in July after suffering steep losses on AI stocks, according to a letter sent to investors on Thursday that was seen by Reuters.

The AI-focused hedge fund run by Aschenbrenner, a former OpenAI researcher, sold the bulk of its stock portfolio to billionaire Ken Griffin's Citadel this week and unwound most of its public equities portfolio, Reuters reported, citing sources.

"We came closer to permanent capital impairment than is acceptable to us," he wrote in the letter to investors, adding that while the firm ultimately found a solution, it never intended to be in that position.

"We let you down this month," Aschenbrenner said in the letter, whose contents were first reported by the Wall Street Journal late on Thursday. Still, its gains for the year were so staggering that the fund continues to be up 80% in 2026, the letter showed.

The hedge fund remains "very optimistic" about its portfolio, he added, saying the underlying fundamentals continue to strengthen even as share prices have fallen sharply.

Since launching the fund in 2024, Aschenbrenner has garnered a cult-like following among investors for his bets on the AI sector.

A global selloff in chip stocks has revived fears that the AI boom may be losing steam and that valuations have reached unsustainable levels, wiping out gains from crowded bets across the sector. Short sellers have also piled in, betting the stocks will fall further.

Hedge funds typically borrow heavily from lenders to increase their exposure to the markets and boost returns. But those leveraged bets can unravel quickly when markets move against them, prompting margin calls from prime brokers.

"We worked to keep the portfolio within our risk parameters, but gradually this became more difficult as positions rapidly moved against us and market liquidity dried up," Aschenbrenner told investors in the letter, adding that the hedge fund has removed all leverage from the portfolio.

He wrote that the portfolio experienced a significant drawdown in the month of July, which was exacerbated by extreme moves in core positions over the past week. 

Besides the AI-related hit, the firm also saw adverse trading in stocks publicly associated with it. "These dynamics are essentially similar to a bank run: vulnerability begetting more vulnerability."

(Reporting by Anirban Sen in New York and Manya Saini in Bengaluru; Editing by Shinjini Ganguli)