The Downside of Up
The Credit Strategist - August 2026
In launching his fund in 2024, Situational Awareness L.P.’s then 22-year-old Leopold Aschenbrenner wrote: “But right now, there are perhaps a few hundred people, most of them in San Francisco and the AI labs, that have situational awareness. Through whatever peculiar forces of fate, I have found myself among them.” This hubris led Mr. Aschenbrenner, who lacked any meaningful investment experience or deep understanding of financial markets, to grow his fund to a reported $45 billion as of July 1st of this year, just a few weeks before it blew up (it reportedly started 2026 at $3 billion after posting strong performance in 2022 and 2023 and rising over 400% year-to-date in 2026) by using heavy leverage to invest aggressively in AI-linked companies. He gained a large following on social media after publishing a series of essays in 2024 arguing that rapid advances in AI would require enormous expansion of computing power, advanced semiconductors, memory chips and energy infrastructure). Those ideas drove the investing strategy for his fund which he opened after leaving OpenAI. His overlong essay “Situational Awareness” gained a cult following among people who knew even less than he did and was treated like a holy screed. Unfortunately, there is a great deal more to managing a fund than investment ideas (more on this below).
When there has been inexplicable or at least highly unusual trading activity in individual sectors or securities, it often tracks back to one or more firms engaging in reckless behavior almost always employing dangerous amounts of leverage. Long Term Capital Management drove the prices of junk bonds to irrationally high levels before it blew up in 1998 by using leverage to buy those bonds at extremely high prices (it kept outbidding my firm for bonds and we couldn’t figure out who would pay those prices which generated very meager returns). Archegos Capital Management borrowed excessively to buy stocks large concentrated positions in stocks like Viacom, Baidu, Vipshop and Farfetch before vaporizing, sending those stocks to the moon and its manager Bill Hwang to jail. And now we see Mr. Aschenbrenner used enormous amounts of leverage to buy stocks like SNDK, BE, NBIS, CORZ and CRWV that rose far above any sustainable valuations until they fell back to earth faster than a SpaceX rocket (SPCX stock is doing the same and no doubt was in the portfolio as well). Large funds employing leverage far beyond that allowed by traditional margin rules with the able assistance of Wall Street banks touting their responsible lending practices to the media and politicians are distorting markets and damaging not only themselves but other market participants. Those attuned to abnormal price action are better able to step aside and avoid these episodes rather than surrender to the temptation to indulge in reckless behavior. The minute Mr. Aschenbrenner showed up on the scene, it was obvious he would blow up.
Situational Awareness L.P. was reportedly down around 67% in July, which left it up a meaningless 80% year-to-date (on mark-ups of private positions like a large investment in Anthropic, a position that seems to be singlehandedly inflating tech earnings this year). This 80% figure is largely meaningless because it only applies to investors in the fund at 1/1/26; anyone who invested later has a different return, and the later they invested, the lower that return would be (with the last ones in the door likely wiped out or nursing deep losses). Touting the 80% return as some kind of success is like a surgeon telling a patient’s family that the operation was successful, but the patient died. Mr. Aschenbrenner not only showed an appalling lack of risk management skills but a reckless disregard for his partners’ capital. Handing a 24-year-old tech bro with no investment experience billions of dollars of borrowed money was like handing an alcoholic the keys to a bar. The only question was how quickly he would drink himself into a stupor and drive his car into a wall. Now we know.
As noted above, Situational Awareness’s aggressive buying of the most overbought tech stocks contributed to their ridiculous rallies before its frantic sales of those same positions to meet margin calls contributed to the sharp sell-off in those same stocks in July. Whether the sale of the portfolio to Citadel ends, or just pauses, the sell-off remains to be seen. The larger forces depressing stocks remain in place – high inflation, a hawkish and close-mouthed Fed, legitimate questions about the AI buildout – are unaffected by this drama. After breathing a sigh of relief that Uncle Ken came to the rescue, markets still must wrestle with these other issues.
“Situational awareness” for a fund manager doesn’t only apply to the investments made by a fund but also to how those investments are financed and structured. On that last count, this fund was situationally clueless. “Situational awareness” requires humility, a deep understanding of financing structures, healthy respect for leverage, and knowledge of market history. If you think you know things that nobody else knows, or that you’re smarter than everyone else – and are dumb enough to say those things aloud or write them down and blast them to the world - you don’t know a thing. It took less than a month for excessive leverage to wipe out a $45 billion fund. All that’s left are private holdings that can only be sold at steep discounts, inflicting more losses on investors. Citadel was generous by only extracting a reported 10% discount on Situational Awareness’s public stocks, but likely Mr. Griffin wanted to help avoid a much more negative market event that could have also harmed his firm. Others might have been more short-sighted (which is why Mr. Griffin is justifiably highly respected).
The prime brokers who leveraged this fund to the gills seem to have avoided losses by helping arrange the sale of all of the fund’s public securities to Citadel. But they bear responsibility for allowing the situation to approach the brink of disaster. They failed to act like adults when clearly dealing with a child manager with very limited market experience. But then again, Wall Street isn’t there to protect anyone’s interests but its own. For the most part, it’s happy to load the gun and hand it to people who don’t know how to shoot. Unfortunately, as we learned during the 2008 financial crisis, Wall Street doesn’t recognize when it doesn’t recognize its own interests and aims the gun at its own head. Greed always trumps fear until it’s too late. The Street got lucky this time. Next time the outcome could be different.
