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BY NOW, YOU’VE probably heard the story of the 25-year-old wunderkind Leopold Aschenbrenner. After graduating as valedictorian from Columbia University at age 19, he worked for FTX, the crypto trading firm, then found his way to OpenAI, where he worked as a researcher for about a year, until mid-2024.
In the months after he left OpenAI, Aschenbrenner wrote a 165-page paper titled “Situational Awareness,” in which he detailed his views on the future of artificial intelligence. The paper was full of dramatic pronouncements—“the exponential is in full swing now,” he wrote—and ended up being shared widely online.
Capitalizing on that attention, Aschenbrenner established a hedge fund to make bets on the AI economy. He named the fund Situational Awareness, and at first, things went remarkably well. In its first two years, it grew to $45 billion in assets as he correctly identified some of the biggest beneficiaries of the AI build-out, including memory chip maker SK Hynix, fuel cell producer Bloom Energy and AI infrastructure provider CoreWeave. The fund also shorted traditional software company stocks, betting that AI would pressure their business models. And Aschenbrenner invested in some private companies, including Anthropic, the developer of Claude.
For a while, these bets worked out extraordinarily well. In its first two years, the fund reportedly gained 1,000%. The rest of Wall Street began to follow him closely. In a June profile, The Wall Street Journal wrote that his fund’s regulatory filings “are studied like scripture.”
But earlier this summer, both of the trends Aschenbrenner had been betting on reversed at the same time. Fears that AI infrastructure spending was becoming unsustainable led many of these stocks to fall 30% or more. And the traditional software stocks that Situational Awareness had been betting against—companies like Adobe and Salesforce.com—began to rebound, with some rising 20% or more.
Those reversals alone would have been a problem, but it turned out that Situational Awareness had also been borrowing on margin to increase the size of its bets. According to estimates, it was leveraged up to 400%. That led lenders to begin closing in.
It got even worse from there, when the fund’s high profile began to work against it. As it attempted to sell positions to reduce its debt, it got trapped. Because of the size of the orders it was placing, and their concentration among AI stocks, other traders were able to guess that Situational Awareness was the seller. That spooked investors, leading others to sell, thus compounding a downward spiral. In a letter to investors, Aschenbrenner compared it to a bank run.
Over the course of the next few weeks, as the fund’s assets dropped from $45 billion to just $10 billion, Aschenbrenner found himself with few options. At the end of July, he announced that the fund had sold virtually its entire portfolio of publicly-traded stocks to the investment firm Citadel. Because the positions were so large and thus difficult to sell on the open market, Situational Awareness was forced to sell them at what was reportedly a significant discount.
This story might not necessarily seem relevant for individual investors. But there are, I think, several conclusions to draw from this episode.
First, and perhaps most important, it’s a reminder that risk management should always come first. After so many years of market gains, it would be easy to become complacent. But it’s precisely when the market is doing so well that investors should be diligent in considering rebalancing.
This story also reminds us of the importance of diversification. To be sure, Situational Awareness made mistakes, but it also got one very important thing right: It was diversified. Though it had to conduct a fire sale of its publicly-traded holdings, it still holds a multi-billion-dollar stake in Anthropic. Without that, it might have faced total liquidation. The lesson: We should never go too far out on a limb with any investment idea.
British economist John Maynard Keynes was famous for his observation that, “markets can remain irrational longer than you can remain solvent.” In other words, for an investment to be successful, it needs to be correct and correct over the right timeframe. In an ironic twist, in the few weeks since Situational Awareness offloaded its holdings at a discount, many have rebounded. If it had been able to hang on a little longer, the fund might have been able to avoid the situation it was forced into. The lesson: Liquidity is important. This is one of the many reasons I recommend that individual investors avoid private funds—because an asset really only has value if you can sell it when you want to, or need to.
The Situational Awareness story also teaches us something about the narratives that surround the stock market. Because of the number of variables involved, it’s all too easy for market observers to paint virtually any picture they wish. And since no one has a crystal ball, no one can say that anyone else is necessarily wrong at any given time. Concerns about “circular” deals in the AI ecosystem have ebbed and flowed over the past few years, as have worries about the impact of AI on traditional software companies. The lesson: We should be careful to never worry too much about the news of the day because it’s often just that—today’s news, only to be replaced by a potentially different narrative tomorrow.
There’s an easy comparison between the events at Situational Awareness and the failure in the 1990s of the hedge fund Long-Term Capital Management (LTCM). Both got off to a fast start, both involved leverage and both were run by extraordinarily impressive individuals. At LTCM, two of the founders had Nobel Prizes. But ultimately, IQ doesn’t guarantee success. Nothing does. And that, I think, is another key lesson for investors to draw. In managing our personal investments, we should always look for ways to maintain a balanced, center-lane approach.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Helpful cautionary tale about how quickly things can change.
And for a laugh, I saw this posted on another site:
Maybe the fund can update its name to “Situational Unawareness”
Fortunately, I know several successful investors personally.
We’re a group of slow traders who invest in what is currently working and select funds—not individual stocks—with strong risk-adjusted performance. We’ve been doing this for more than 20 years. We don’t use leverage, and we’re slow traders.
Sure, buy and hold is a perfectly reasonable strategy. But here’s the question: What funds—no annuities or other insurance products—would you use for a retiree who wants to earn an average of 9-10% annually while never losing more than 10% from any last top?
You can’t do it with buy-and-hold. There is no fund or conventional portfolio that can reliably deliver that combination of return and downside protection. If you want both, you need to be willing to adapt.
I’m one that isn’t willing to adapt. Actually I would but I don’t feel the need to. For the last thirty years my reason for buy, hold, and stay 100% in stocks with no bonds is if I had kept adapting such as holding bonds I would lose more upside than is I always stay in stocks and take ten or twenty percent drop in my portfolio.
Sure, if you can stay invested in 100% stocks, you will likely earn excellent long-term returns. But most people can’t and shouldn’t do it.
I know an MD who kept 90% of his portfolio in stocks throughout his entire life. At one point during retirement, he had $10 million and lost $3 million in a market downturn. He didn’t care. He had more than enough money and was comfortable with the risk.
That’s the key point: the right level of risk depends on how much money you have and how much you need—not just on expected returns.
Most workers don’t have a pension, a large inheritance, a stable high-paying job for decades, or millions already saved. They simply can’t afford the risk of a major market decline when they approach retirement.
When I retired, my portfolio was more than 25 times our annual expenses. Based on our spending and assets, we should have no problem funding our lifestyle through age 100.
So why in the world would I risk that security by going 100% stocks?
For me, the goal isn’t to maximize returns. It’s to have more than enough money while taking as little risk as necessary.
BTW, I still manage to make 11.7% annually since 2018 using 95% in bond OEFs and hardly losing from any last top.
Very interesting article, with actually most of the articles from Adam Grossman written clearly in the third person, which makes it easy to read and follow. Have been reading his articles for a number of years, and articles like this make a largely confusing set of events effortless to follow while exposing financial commotion.
Great article Adam! Thanks for sharing.
Debt (leverage) is bad. I read somewhere in one of my investing books that a company that has no debt can’t go out of business.
If Aschenbrenner hadn’t leveraged up his fund might still be around.
I’d heard about this, but didn’t follow all the connections to the dramatic consequences. Now I understand better. While reading this post, I was reminded or sayings like “what goes around comes around” and “he who lives by the sword dies by the sword”. Thanks for the (recent) history lesson.
Thanks, Adam. Your always sensible and pragmatic analyses are like a periodic booster shot….and help keep my head screwed on straight.
Thanks for the additional information about what happened to Situational Awareness (no irony in that name…). It’s interesting that they didn’t account for their growth and industry concentration being a potential existential issue. Or model the risk associated with various investment strategies and their leveraged investing, and hedge that risk? I used to work in a department led by a PhD in economics, and one of his favorite sayings was “the only true thing you know about a forecast is that it’s always wrong.”
“Concerns about “circular” deals in the AI ecosystem have ebbed and flowed over the past few years, as have worries about the impact of AI on traditional software companies.”
The blog post linked below showed up in a social media feed today. I was wondering what people thought of his thesis. The author, Mike Brock, used to work in management at Block Inc. (originally Square, CEO is Jack Dorsey). While similar information has been published elsewhere, I thought the post did a good job of illustrating the various linkages, describing how the AGI industry is built on circular financing, and how the contract terms of the proposed Ellison/Paramount-Skydance acquisition of Warner could be the trigger for a collapse. (He does have a financial interest in the outcome, which he acknowledges in the post.)
Of course, if failure is not an option, and since they all rely on each other, the various stakeholders would figure out a way to keep the arrangement afloat, through financial help, legal maneuvers, legislation, protectionism, etc.
https://www.notesfromthecircus.com/p/the-house-of-ellison-is-on-the-brink
Thanks for the link, which had another link, so I was doubly entertained. LTCM seems like a minor blip compared to what is happening now. I hope the government (us) have enough money to backstop all of it.
Adam, thanks for detailing the story of Aschenbrenner. and the lessons to be learned from it. One point I think everyone should heed is the need to be aware of the risks of owning stocks. There’s a difference between optimism about the long-term growth of the stock market and willful blindness of the possibility of a significant, short-term drop. It would be a shame–and perhaps disastrous–to be forced to sell good assets at the wrong time, as Situational Awareness had to do.