A cautionary tale unfolds in the financial world, highlighting the perils of hubris and speculative investing. The swift demise of a hedge fund, ironically named "Situational Awareness," serves as a stark reminder of the importance of experience and prudent risk management, particularly when its chosen name implies a mastery it clearly lacked.
Founded by a 24-year-old former OpenAI employee, this artificial intelligence-focused hedge fund recently divested most, if not all, of its public stock portfolio to Ken Griffin’s Citadel. This dramatic move followed several challenging weeks for AI stocks, confirming earlier market anxieties about the sector's volatility and revealing a firm that, in financial terms, was "swimming without a bathing suit."
The extent of the financial catastrophe is staggering. According to CNBC, the fund's value plummeted from an estimated $45 billion at the beginning of July to just $10 billion after the asset sale. To put this in perspective, this loss significantly overshadows the previous record for trading losses held by Archegos Capital Management, which lost $8 billion in ten days in 2021. If these figures hold, Situational Awareness's AI bets resulted in losses more than three times greater.
Further details surrounding the fund's operations add to the narrative of misjudgment. Situational Awareness maintained a lean staff of eight, with only four designated as investment professionals. Its largest holdings at the end of the first quarter, including Nebius Group, SanDisk, Micron, and CoreWeave, all experienced declines exceeding 35% within a month, as reported by CNBC. Anticipation builds for further revelations, especially from Wall Street professionals who were on the advantageous side of these trades.
The intellectual foundation of Situational Awareness LP was rooted in a series of essays on machine intelligence penned by its 24-year-old mastermind, Leopold Aschenbrenner. He articulated a vision of rapidly advancing AI, stating, "We are building machines that can think and reason... By 2025/26, these machines will outpace many college graduates. By the end of the decade, they will be smarter than you or I; we will have superintelligence, in the true sense of the word." Aschenbrenner further predicted significant national security implications, envisioning a potential race or even war with the CCP.
These essays formed the theoretical bedrock of the hedge fund, premised on the belief that artificial general intelligence (AGI) was not only real but imminent, projected to arrive by 2027. The fund's entire strategy, therefore, revolved around aggressively investing in AI stocks to capitalize on this anticipated technological revolution and generate substantial wealth.
Aschenbrenner further elaborated on his vision in a four-hour podcast interview with Dwarkesh Patel, a favored medium among the Silicon Valley elite. He asserted, "Basically, this investment firm will be kind of like a brain trust on AI. We’re going to have way more situational awareness than any of the people who manage money in New York. We’re definitely going to do great on investing, but it’s the same sort of situational awareness that is going to be important for understanding what’s happening, being a voice of reason publicly, and being able to be in a position to advise.”
Remarkably, Aschenbrenner's essays, despite containing what some might deem "bad graphs," garnered significant attention and praise from a particular segment of the Silicon Valley community. Axios lauded his "opus" as "a useful, eye-opening synthesis of high-level Silicon Valley conversations." Shav Vimalendiran, co-founder of SAMMY Labs, an AI company, credited Aschenbrenner with expanding his perspective, while even Ivanka Trump endorsed it as "an excellent and important read."
This raises a crucial question: why would purportedly serious and accomplished individuals choose to invest in a 24-year-old's inaugural hedge fund?
The list of backers included prominent figures such as Patrick and John Collison, co-founders of Stripe, and two Meta AI leaders, Daniel Gross and Nat Freedman. Carl Shulman, who previously worked at Peter Thiel's Clarium Capital, served as the fund's director of research. Notably, Jane Street, a Wall Street firm known for attracting young Effective Altruists, also invested, a move that The Wall Street Journal highlighted in June as particularly unusual given the firm's rare allocation of capital to outside money managers.
The most plausible explanation for this collective investment, as suggested by observers, is a reliance on Aschenbrenner's cultivated "social bonafides." This practice of vetting individuals based on social proof, however, has proven to be a notoriously unreliable and often disastrous method, as evidenced by failures ranging from Theranos to Bernie Madoff's scheme. Yet, it appears to have been deemed sufficient within certain Silicon Valley circles.
Aschenbrenner's background certainly presented an impressive facade. At age 17, he was hailed as an "economics prodigy" by libertarian economist Tyler Cowen, a figure revered in some Silicon Valley communities. He received a grant from Cowen's Emergent Ventures and published essays in Works in Progress, a publication funded by Stripe. While at Columbia University, he co-founded the college's Effective Altruism chapter and graduated as valedictorian at 19 in 2021. His career trajectory then led him to the FTX Future Fund, the philanthropic arm of the now-defunct cryptocurrency exchange FTX, where he worked alongside influential figures like William MacAskill and Avital Balwit.
Following his stint at FTX, Aschenbrenner secured a position on OpenAI’s superalignment team. However, his tenure there was not without controversy. Fortune reported former coworkers describing him as "politically clumsy," arrogant, and abrasive. An incident at a holiday party, where he allegedly disclosed the number of GPUs OpenAI possessed to then Scale AI CEO Alexandr Wang (an accusation both Wang and Aschenbrenner deny), predated his eventual firing from OpenAI for an unrelated leak of internal information. Two months after his dismissal, Aschenbrenner published his influential "Situational Awareness" essays.
Astute observers would note that Aschenbrenner's resume, at the time of launching his hedge fund, conspicuously lacked any prior money management experience. His cumulative professional background consisted of mere months at FTX and approximately a year at OpenAI. This glaring lack of relevant experience prompts questions about the judgment of his affluent backers, such as the Collisons, Gross, and Freedman, and whether they possessed an excess of capital to risk.
Ironically, Aschenbrenner articulated his fund's primary objective in the optimistic early days of 2024: "Obviously, not blowing up is task number one and two," he told Patel. "You have to get the timing right. The sequence of bets on the way to AGI is actually pretty critical. People underrate it.”
While a full post-mortem of Situational Awareness's collapse is still emerging, the current picture points to the aggressive use of leverage. Hedge funds often borrow extensively to amplify their bets. As Bloomberg's Matt Levine explained, a firm truly convinced of the AI boom's potential wouldn't invest "100% of your money (and your investors’ money) into the AI boom,” but rather "like, 300% of your money." At one point, the hedge fund proudly claimed returns of 439 percent.
However, the same leverage that magnifies gains also drastically amplifies losses. When AI stocks, on which the fund was heavily leveraged, began to decline, lenders initiated "margin calls," demanding additional collateral. Situational Awareness reportedly held urgent calls with investors and lenders to secure more capital, even offering to sell portions of its portfolio. Ultimately, the fund sold what the Financial Times described as "a large portion of its $16bn public equity" to Citadel, Ken Griffin's hedge fund.
Public equity represents the most liquid component of a portfolio. Situational Awareness still retains private holdings, including an estimated $5 billion stake in Anthropic, according to the Financial Times. CNBC reported that negotiations were also underway to sell this stake, though its completion remained uncertain.
Reflecting on risk in 2024, Aschenbrenner had remarked, "You’ve got to be really, really careful about your overall risk positioning. If you expect these crazy events to play out, there’s going to be crazy things you didn’t foresee.” Perhaps one such unforeseen "crazy thing" was the delayed, or possibly non-existent, arrival of artificial general intelligence by 2027. He once joked about being "perfectly hedged": "Either AGI happens this decade and my human capital depreciates, but I turn it into financial capital, or no AGI happens and the firm doesn’t do well, but I’m still in my twenties and smart.”
Indeed, Aschenbrenner is certainly still in his twenties.
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