When Leverage Goes Wrong on Wall Street

**Travis Hoium** (0:02)
No margin calls for the next hour. Motley Fool Hidden Gems Investing starts now.
Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium. Joined today by Lou Whiteman and Jason Moser. Guys, we've got to start with the news of the week. Lou, that is Situational Awareness getting a margin call. The hot investor of 2026 is now out of the equity markets. What in the world happened?

**Lou Whiteman** (0:30)
Yeah. Let's talk about this because this is fun. First of all, Situational Awareness, the AI-focused hedge fund founded by, I hope I'm saying this right, Leopold Aschenbrenner, I think it is. Now, Leopold has a heck of a history already. I mean, it's almost like the Forrest Gump story here. All right, guys, he was at FTX with Sam Begman Fried. He was at OpenAI, and then he went off and he actually just wrote, I think it was a sub stack or something talking about Situational Awareness basically that AI was going to eat the world.
Got a lot of buzz, and he turned it into a hedge fund. His hedge fund, same name, Situational Awareness, focused on AI bets. And, you know, as the tide was rising, so too did his portfolio. The fund borrowed heavily to multiply its returns. We don't know exactly how much, but we know this because the fund's return were better than the underlying assets that it was buying in terms of their returns. So there's obviously leverage. At its peak, it soared from a couple hundred million to 20 billion in assets, up 440% in the first half of the year. But, guys, we've seen this.

**Travis Hoium** (1:32)
In the first half of the year, I want to highlight this. The first half of the year, which ended exactly one month ago today.

**Lou Whiteman** (1:38)
Yeah, yeah, yeah. But look, we have all seen this movie enough times to know what happened here. You know, the AI infrastructure trade has taken it on the chin of late. Some of Situational's positions, you know these companies, Micron, SK Hynex, CoreWeave, they were down big. And short positions that they also took on betting against software. Like they were basically in on the AI is going to eat all software. So short software companies to the ground. Those started turning against it too. The banks that provide leverage called SEDHI to avoid liquidation. The firm negotiated a rapid fire sale to Citadel.
Don't cry for Leopold, though. He retained the private assets include. And this is the last scene of the movie here, including a $5 billion stake in Anthropic. He still has that, but yeah, a heck of a week. Lots to learn here. This is actually, I think there's a lot of...
I don't know if JMo and I are going to be building similar portfolios, but I still think there's a lot we can learn here.

**Travis Hoium** (2:36)
I want to start with the margin piece of this because I think this is important for investors to understand. This is why we talk about not using margin, but I want to explain a little bit of the math behind it before we get to the Citadel bio, because I think that is also really interesting that they've become the villain in a lot of circles, but they actually may have saved the day. But Jason, the math on this, just on a basic sense, I think that we, the reporting is that he was about 4X levered. So $20 billion fund, let's just use that simple math, owns $80 billion worth of stocks.
If those stocks go down 25%, you have nothing left. All you have is your debt. Your equity is now zero. That's how you get in trouble really, really quickly, because it's not, you're leveraged on the upside when things are going well. Like Lou said, you can have a 400% six-month run. By the way, I think that 430-something percent number was after fees. So the real return was probably well over 500%.
But this is where a, you know, a big move, but these companies aren't going bankrupt, can get you in a lot of trouble.

**Jason Moser** (3:48)
Sure.

**Travis Hoium** (3:48)
Yeah.

**Jason Moser** (3:48)
And I mean, that's, I think, so I personally, I don't invest, you know, on margin. I don't use debt to invest. It's just, it's just not my style. It's not what I do. And I think part of that is, at the end of the day, you don't really control what's going on, right? You don't ultimately call the shots. At some point, if you have any sort of thing that shifts in the market for whatever reason, I mean, you're completely out of control, right? Somebody else is going to call you, and like Lou said, the bank calls us, hi, how are you? We like our money back, please. And you have nothing you can do.