Short selling, margin calls and…: How Leopold Aschenbrenner’s AI hedge fund Situational Awareness lost $35 bn in a month

Only two years ago, Leopold Aschenbrenner was hailed as the “Nostradamus” of AI — a young oracle with a bold prophecy for the future.

“Before long, the world will wake up,” Aschenbrenner, a former OpenAI researcher turned hedge-fund manager, predicted in 2024. This week, it did — but not in the way Aschenbrenner had foreseen.

Aschenbrenner's bullish bet on AI ran into trouble this week as his hedge fund, Situational Awareness, suffered heavy losses after semiconductor stocks tumbled, triggering margin calls.

In the blink of an eye, he watched its assets plunge from $45 billion at the start of July to about $10 billion. And he was forced to offload all of his leveraged stock bets — including hard-hit names like SK Hynix and CoreWeave – to Ken Griffin’s Citadel at a discount

“We worked to keep the portfolio within our risk parameters, but gradually this became more difficult as positions rapidly moved against us and market liquidity dried up,” Aschenbrenner wrote in a letter to investors late Thursday.

“We took the steps that were necessary to fight another day,” he goes on to add.

What sparked the sell-off at Situational Awareness?

In his brief stint as a hedge fund manager, Aschenbrenner has witnessed both the AI boom and growing fears of a bubble.

Before this month’s decline, Situational Awareness racked up gains of more than 1,000% since inception, The Wall Street Journal reported last month. Owing to this, banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Corp. were happy to power his rise, with some firms offering to lend the fund four to five times its capital, sources told Bloomberg.

And then, as tech stocks have started to slide over the past few weeks, the lenders have proved unwilling to ride it out.

Aschenbrenner began selling his investments to cover margin calls. The sell-off spread across global markets, with investors trying to understand the cause of the market turmoil.

The selloff on Wednesday was “completely unwarranted to be honest,” Vuk Vukovic, chief investment officer at Oraclum Capital, told Bloomberg. “There had to be something else behind it. And, now we see what happened”

Though Aschenbrenner took full responsibility for the events, he attributed part of July’s plummet to short sellers who targeted the shares he owned.

‘Heavily concentrated in a single sector’

A heavy reliance on a single sector proved to be Situational Awareness's biggest vulnerability, several experts noted.

As some of its positions reached all-time highs in recent weeks, the company was on the hunt for additional banks to finance its bets. The fund approached some lenders, including Barclays Plc, to work with their prime brokerage units, according to the Bloomberg report.

Barclays turned away the firm because it was concerned about the level of its exposure to just one sector

“This blow-up as a matter of not if, but when,” said Jerry Diao, who runs a Wall Street coaching firm, told CNBC. “Maybe Aschenbrenner's views on AI are correct in the long run, but in the public markets, you have to be prepared for the short-term.”

Aschenbrenner, however, said he has learned his lesson from the recent developments and also vowed in writing, in the client letter, to run his public stock portfolio without leverage “while we draw the lessons from these developments.”