How ‘Situational Awareness’ Hedge Fund Dropped 67% in AI Stock Rout

CNN tells the unfortunate tale of hedge fund Situational Awareness, “founded in 2024 by German-born Leopold Aschenbrenner when he was in his early 20s.”

Aschenbrenner, a former OpenAI employee, founded the hedge fund on the premise that “AI will be the dominant driver of global market returns over the next decade,” according to the firm’s site… Aschenbrenner managed to turn hundreds of millions of dollars into tens of billions of dollars over the course of roughly two years… That streak ended on Thursday, though, when the fund was forced to sell the bulk of its public holdings to a bigger rival after many of its investments went south.

But that’s only part of the story. The fund employed a risky strategy of borrowing money to purchase stocks. When the investments appreciate, the payoff can be massive. But when the investments sour, the losses can be catastrophic. The downturn in AI stocks over the course of this month, like chip makers and cloud computing providers, hit the hedge fund extra hard. It was forced to sell off many investments at a steep discount to rival hedge fund Citadel in what Aschenbrenner reportedly compared to a “bank run” in a letter to investors.
“Critics pointed out that Aschenbrenner had no experience running money prior to launching his fund in July 2024, calling him more lucky than smart,” writes CNBC:

Some noted that his early work experience was at the doomed crypto firm FTX, where he helped now-disgraced founder Sam Bankman-Fried run a charity out of a Bahamas penthouse. Others on Wall Street, including former traders at global investment banks, noted that in light of reports Situational Awareness used as much as 400% leverage, the collapse wasn’t shocking.
The Wall Street Journal reports that Situational Awareness “also used options to amplify its returns. That meant that even small declines in individual names could have big impacts on Situational’s portfolio.”

And so, as the New York Post put it, “The celebrated crystal ball of the ‘Nostradamus of AI‘ hasn’t merely gone cloudy — it has rolled off the table and shattered on the parlor floor.”
Wall Street breathed a huge sigh of relief last week as an AI-focused hedge fund called Situational Awareness reportedly sold most of its portfolio — reportedly down 67% last month on the backfiring of debt-fueled bets on chipmakers and assorted artificial-intelligence firms — to billionaire Ken Griffin’s Citadel…

The prevailing sentiment was best summed up by a veteran Wall Street sage who has seen a lot of flameouts in his day. Let’s just say he wasn’t impressed by Leopold Aschenbrenner, the 25-year-old German-born “Nostradamus” figure who is the founder of Situational Awareness… “Just your typical leveraged Âidiot who was right until he was wrong,” the source said, adding that the implosion is a “one-off…”

[Another trusted source] felt there was room for conversation: “A significant issue. Not viewed as systemic right now. I wonder if that changes as more problems arise.” Indeed, the fact is that most of Wall Street is closely monitoring the Situational Awareness situation because they were holding many of the same positions as ÂAschenbrenner. Another top hedge fund manager I won’t name tells me he has been getting crushed on similar investments in chipmakers essential to the AI supply chain, as well as other companies feeding off this technology.
Thanks to Slashdot reader joshuark for sharing the news.