Aschenbrenner’s AI Fund Collapse Is Just The Beginning

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**Ed Elson** (1:41)
Welcome to Prof G Markets. I'm Ed Elson. It is August 4th. Let's check in on yesterday's market vitals.
The major indices climbed after President Trump called off an attack and Iran indicated Hormuz negotiations are making progress. The Dow closed at a record high, and Amazon reached a $3 trillion valuation for the first time. Meanwhile, Brent crude fell. The yield on 10-year treasuries declined. And finally, the Japanese yen climbed after the US joined Tokyo to support it. More on that later.
Okay, what else is happening? For months, investors have been asking how the AI boom might end. And last week, they got a glimpse. 24-year-old Leopold Aschenbrenner's fund Situational Awareness sent a letter to investors on July 24th, reporting a 439% net return for the first half of the year. In a postscript, Aschenbrenner wrote that it was a particularly good time to add funds, but just six days later, the fund had lost roughly $35 billion in assets, plunging from a peak of $45 billion to around $10 billion. And Aschenbrenner was forced to unwind his entire public stock portfolio in a fire sale that ended up going to Ken Griffin's Citadel. Investors are reading this story as a warning sign for the increasingly debt-fuelled AI boom. Situational awareness reportedly used as much as 400% leverage to amplify its bets on AI infrastructure. That helped the firm return more than 1,000% since its inception. But when those bets went south, the same leverage accelerated the losses and forced the fund into liquidation. We wanted to talk to someone who manages the fund and who has spent years thinking about leverage and market structure. So we're going to discuss this with Michael Green, Chief Strategist and Portfolio Manager for Simplify Asset Management and author of the Yes I Give a Fig sub stack.
Michael, thank you so much for joining us. Let's just start with your initial reactions to the implosion of situational awareness. How did this happen? What can we learn from it?

**Michael Green** (3:55)
You know, the quick answer is that when you look at somebody who is engaged in the behaviors that Leo has, there's really no mechanism for him to have learned not to do this. And so he had a very strong thesis. He expressed it with the extraordinary use of leverage. His initial exposure was largely to non-public entities, and he had grown his business under that framework, which has a component of much lower volatility framing to it, because non-public entities don't reprice themselves in the same manner. But when you start running strategies that are running that much leverage against this much volatility for the individual securities, unfortunately a blow up becomes inevitable, and it really looks like what happened within Leo's portfolio is that he created conditions under which a small decline in prices would force him to sell to reduce his leverage, which in turn caused prices to fall further, which caused him to be forced to sell to reduce leverage further, and ultimately that cascaded into an event that sent both his longs and his shorts against him, in particular, he very much had the thesis that traditional software companies would be heavily disintermediated by the growth of AI, in particular, the software sector, that obviously contributed to the underperformance of that sector for a period. His selling actually contributed to the underperformance of that sector, and as he began to be forced to unwind his portfolio, that forced prices to move in the opposite direction of his underlying positioning and created conditions for the rapid collapse of the fund and the need to deliver it in as quick a time as he did.