The Big Lesson from the Implosion of Leopold Aschenbrenner’s $20 Billion Situational Awareness Hedge Fund
Leo’s fund was up 439% at the end of June. Then it all fell apart.
Those who do not learn from history are doomed to repeat its mistakes.
Financial history is littered with hedge funds that start with a good fundamental idea, post a period of incredible returns, and then through hubris and too much leverage collapse and give it all away.
Long-Term Capital Management. Archegos. Amaranth Advisors. And now this week, Leopold Aschenbrenner’s Situational Awareness.
Here’s the basic timeline:
• Late Wednesday, the Financial Times reported that Leo’s fund suffered “heavy losses” this month and had sent investors a letter last Friday, July 24, telling them of its troubles. In the ensuing three trading days this week, many of his top positions fell dramatically again, several down 30% or more.
The thing is once you tell investors, word gets out. The market is filled with sharks. Other hedge funds smell blood in the water and likely tried to force Leo’s fund to further capitulate. The forced selling and other funds pressing, explains a lot of the price action in recent days and weeks.
The FT also said: “Several people familiar with the matter said that Situational Awareness had used borrowing to magnify its returns, a popular hedge fund strategy that can also amplify losses in a downturn.” And “the firm was up 439 per cent on a net basis for the year as of the end of June.”
• Early Thursday, David Faber reported on CNBC that Situational Awareness “exited all of their public investments” the entire stock book, “both the longs and the short book” in one enormous block trade, all sold to a single fund. Faber said, Leo’s fund “is levered. Heavily so .. as much as four times.” He also said on July 1 that the fund’s NAV was $45 billion.
• Midday Thursday, The Wall Street Journal reported that Ken Griffin’s Citadel bought the bulk of Leo’s stock portfolio in the one block trade. Last month, the WSJ reported the fund had $20 billion in AUM.
• Bloomberg also reported that Situational Awareness was forced to liquidate positions to meet margin calls and had been selling public stocks in recent weeks after suffering large losses in AI-related names.
The exact numbers above are still a bit hazy and subject to revision, but the basic theme is clear. Situational Awareness used massive leverage of nearly four times and got run over as many of its top AI longs fell 40–50% this month while its software shorts rose dramatically, leading to margin calls and forced deleveraging. All this after being up 439% for the year at end of June.
As I write this midday Thursday, many of the same AI-related stocks that collapsed in recent weeks are soaring 15% to 25% after the fund’s liquidation news.
The forced leveraged dislocation selling also partly explains the strange price action of recent weeks. After solid earnings reports and strong outlooks, many stocks would trade up temporarily and then sell off significantly. The reactions often didn’t make sense.
The actual reality is the fundamental AI backdrop is robust:
• On Wednesday, Microsoft reported its best earnings report in years, printing 43% growth for Azure versus the 40% consensus and guiding to a further acceleration of 45% growth next quarter. The highest growth rates since 2022. It shows the demand for AI compute is surging. “We see as customer demand continues to exceed supply. Even with the strong close to Q4, we continue to expect H1 growth to accelerate,” Microsoft said.
• Last week, Jensen Huang told Bloomberg that Nvidia is constrained by shortages of HBM and LPDDR memory, land, power, and construction workers. The chip maker is supply constrained versus demand. But even then, Nvidia can grow significantly. “I think we have the ability as an industry to double each year, but we’re going to have a hard time growing much faster than that,” he said.
• Last week at AMD’s Advancing AI event, CEO Lisa Su raised AMD’s agentic AI server CPU 2030 TAM to $220 billion from $120 billion forecast given three months ago. CEOs don’t nearly double their TAMs in months unless they’re seeing insane AI demand.
The crazy part is that Leo’s stock ideas were fundamentally right. Many of his names (NBIS, BE, SNDK) were up well over 100% on average even after July’s selloff. Had he used no leverage, or even a moderate amount rather than 400%, he’d be having a great year and his fund would rank in the top 1% for performance.
More incredible still, Leo may have imploded his fund right before his greatest prediction comes to fruition. Something that will have a massive potential impact on AI-related stocks.
