Investors in Situational Awareness deserved to lose their shirts

Any investor who entrusted Leopold Aschenbrenner with their money and is now cross with him should take note. Mr Aschenbrenner is in his mid-20s and runs Situational Awareness, a hedge fund—named without irony—which posted a loss of 67% in July. He launched it in 2024 after writing a 165-page essay with the same title, arguing that artificial “superintelligence” would transform society before the decade was out.

Situational Awareness (the screed) took Silicon Valley by storm. More surprising, investors responded by shovelling money to Situational Awareness (the fund). Within months Mr Aschenbrenner, then aged 22 or so and having never worked as a trader, was managing hundreds of millions of dollars.

By July this year he was said to be overseeing as much as $45bn. Then many of the artificial-intelligence stocks in which Situational Awareness had taken positions cratered. On July 30th news broke that it had offloaded most of its listed shares to Citadel, a much larger investment firm, at lightning speed. Fund managers do not do this sort of thing unless they face a choice between a quick sale—inevitably at a hefty discount to market value—and a high chance of going to the wall. Mr Aschenbrenner wrote to his investors that he would “fight another day”.

For everyone else, the question is whether his fall from grace portends something worse, since past stock-market busts have often been heralded by whizzy funds turning wobbly. Ken Griffin, Citadel’s boss, has form for snapping up bargains when they do. In the run-up to the global financial crisis of 2007-09, Citadel bought distressed portfolios from Amaranth Advisors and Sowood Capital, two hedge funds, just before each collapsed. A decade beforehand, the implosion of the star-studded Long-Term Capital Management (LTCM) fund came to epitomise the leverage-fuelled boom of the 1990s, which culminated in the dotcom bubble.

What, then, to make of Situational Awareness’s plunge? Regulatory filings suggest the fund was dominated by exposure to firms providing the electricity and hardware that power AI, such as Bloom Energy, CoreWeave and Sandisk. All were doing stonkingly well until a few weeks ago. But between their recent peaks and Citadel’s intervention early on July 30th, each lost over half its value. Mr Aschenbrenner was hardly alone in such bets; over 80% of fund managers responding to Bank of America’s latest monthly survey named “long global semiconductors” as the most crowded trade. The big worry is that this trade’s whiplash-inducing reversal will have set other investment firms teetering, too.

Few, though, can have been run as recklessly as Mr Aschenbrenner’s. He reported returns of 439% for the first half of 2026. Astonishingly, this would leave the fund still sitting on a handsome year-to-date profit even after the past gut-churning month. It is simply not possible to make such a return without either enormous luck or borrowing so much that you risk bankruptcy.

Leverage is what ruined LTCM in 1998, but comparisons between that fund and Situational Awareness are a stretch. In its first four years LTCM never lost money more than two months in a row. Its partners had been trading for Salomon Brothers, an investment bank, for two decades with similar results. Two of its directors had shared the Nobel prize for their work on pricing derivatives. LTCM was still wrong to borrow as much as it did, and its failure might have taken much of Wall Street with it. But its strategy wasn’t bonkers.

Two decades before starting Situational Awareness, meanwhile, its founder was a toddler. And two years before, he was writing Tolkien-esque things like “the free world must prevail” and “I can see it. I can see how AGI will be built”. (Thankfully, everything that Buttonwood wrote in his early 20s has since been scrubbed from the internet.)

Good for Mr Aschenbrenner for chancing his arm. The mystery is what on earth his investors were thinking. Perhaps they weren’t. In which case, that would be more worrying than anything about Situational Awareness’s humbling.