How 'Situational Awareness' Hedge Fund Dropped 67% in AI Stock Rout (nypost.com) 41
CNN tells the unfortunate tale of hedge fund Situational Awareness, "founded in 2024 by German-born Leopold Aschenbrenner when he was in his early 20s."
Aschenbrenner, a former OpenAI employee, founded the hedge fund on the premise that "AI will be the dominant driver of global market returns over the next decade," according to the firm's site... Aschenbrenner managed to turn hundreds of millions of dollars into tens of billions of dollars over the course of roughly two years... That streak ended on Thursday, though, when the fund was forced to sell the bulk of its public holdings to a bigger rival after many of its investments went south.
But that's only part of the story. The fund employed a risky strategy of borrowing money to purchase stocks. When the investments appreciate, the payoff can be massive. But when the investments sour, the losses can be catastrophic. The downturn in AI stocks over the course of this month, like chip makers and cloud computing providers, hit the hedge fund extra hard. It was forced to sell off many investments at a steep discount to rival hedge fund Citadel in what Aschenbrenner reportedly compared to a "bank run" in a letter to investors.
"Critics pointed out that Aschenbrenner had no experience running money prior to launching his fund in July 2024, calling him more lucky than smart," writes CNBC: Some noted that his early work experience was at the doomed crypto firm FTX, where he helped now-disgraced founder Sam Bankman-Fried run a charity out of a Bahamas penthouse. Others on Wall Street, including former traders at global investment banks, noted that in light of reports Situational Awareness used as much as 400% leverage, the collapse wasn't shocking.
The Wall Street Journal reports that Situational Awareness "also used options to amplify its returns. That meant that even small declines in individual names could have big impacts on Situational's portfolio."
And so, as the New York Post put it, "The celebrated crystal ball of the 'Nostradamus of AI' hasn't merely gone cloudy — it has rolled off the table and shattered on the parlor floor." Wall Street breathed a huge sigh of relief last week as an AI-focused hedge fund called Situational Awareness reportedly sold most of its portfolio — reportedly down 67% last month on the backfiring of debt-fueled bets on chipmakers and assorted artificial-intelligence firms — to billionaire Ken Griffin's Citadel...
The prevailing sentiment was best summed up by a veteran Wall Street sage who has seen a lot of flameouts in his day. Let's just say he wasn't impressed by Leopold Aschenbrenner, the 25-year-old German-born "Nostradamus" figure who is the founder of Situational Awareness... "Just your typical leveraged idiot who was right until he was wrong," the source said, adding that the implosion is a "one-off...."
[Another trusted source] felt there was room for conversation: "A significant issue. Not viewed as systemic right now. I wonder if that changes as more problems arise." Indeed, the fact is that most of Wall Street is closely monitoring the Situational Awareness situation because they were holding many of the same positions as Aschenbrenner. Another top hedge fund manager I won't name tells me he has been getting crushed on similar investments in chipmakers essential to the AI supply chain, as well as other companies feeding off this technology.
Thanks to Slashdot reader joshuark for sharing the news.
But that's only part of the story. The fund employed a risky strategy of borrowing money to purchase stocks. When the investments appreciate, the payoff can be massive. But when the investments sour, the losses can be catastrophic. The downturn in AI stocks over the course of this month, like chip makers and cloud computing providers, hit the hedge fund extra hard. It was forced to sell off many investments at a steep discount to rival hedge fund Citadel in what Aschenbrenner reportedly compared to a "bank run" in a letter to investors.
"Critics pointed out that Aschenbrenner had no experience running money prior to launching his fund in July 2024, calling him more lucky than smart," writes CNBC: Some noted that his early work experience was at the doomed crypto firm FTX, where he helped now-disgraced founder Sam Bankman-Fried run a charity out of a Bahamas penthouse. Others on Wall Street, including former traders at global investment banks, noted that in light of reports Situational Awareness used as much as 400% leverage, the collapse wasn't shocking.
The Wall Street Journal reports that Situational Awareness "also used options to amplify its returns. That meant that even small declines in individual names could have big impacts on Situational's portfolio."
And so, as the New York Post put it, "The celebrated crystal ball of the 'Nostradamus of AI' hasn't merely gone cloudy — it has rolled off the table and shattered on the parlor floor." Wall Street breathed a huge sigh of relief last week as an AI-focused hedge fund called Situational Awareness reportedly sold most of its portfolio — reportedly down 67% last month on the backfiring of debt-fueled bets on chipmakers and assorted artificial-intelligence firms — to billionaire Ken Griffin's Citadel...
The prevailing sentiment was best summed up by a veteran Wall Street sage who has seen a lot of flameouts in his day. Let's just say he wasn't impressed by Leopold Aschenbrenner, the 25-year-old German-born "Nostradamus" figure who is the founder of Situational Awareness... "Just your typical leveraged idiot who was right until he was wrong," the source said, adding that the implosion is a "one-off...."
[Another trusted source] felt there was room for conversation: "A significant issue. Not viewed as systemic right now. I wonder if that changes as more problems arise." Indeed, the fact is that most of Wall Street is closely monitoring the Situational Awareness situation because they were holding many of the same positions as Aschenbrenner. Another top hedge fund manager I won't name tells me he has been getting crushed on similar investments in chipmakers essential to the AI supply chain, as well as other companies feeding off this technology.
Thanks to Slashdot reader joshuark for sharing the news.
Average WSB regard (Score:5, Interesting)
For a second I thought this was r/wallstreetbets
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This wasn't just predictable; this was predicted.
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Every generation is determined to learn from past generations in the hardest way possible: By repeating the mistakes that were so obviously made by every previous generation.
Every generation has done this, including mine, but not with a 45B valuation. It's utterly insane, how much people willingly threw at a successful gambler.
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Hedge fail (Score:5, Insightful)
This fund clearly failed on the hedging. No point in using a hedge fund at that point, might as well have just bought the stock (or options if you're crazy).
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True, but there were (and still are) at least two reasons for investors to stick with SALP and Aschenbrenner.
1) He is extremely well connected in SV. He's ex-OpenAI, and shares a house with Sholto Douglas (high level Anthropic employee), Dylan Palel (of Semi Analysis - who are essentially doing the research that SALP, and others, are investing on), and Dwarkesh Patel.
2) Despite this setback, he has still made tons of money for his investors, even this year, and may well continue to do so. Many high profile
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Even after this 67% drop, SALP is still up 80% so far this year,
Ok, so this headline is a bit misleading.
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Why, is losing your money any less painful if the bad decisions were made by 50 or 60 year oldfags like the management of Lehman Brothers back then?
Re:"founded in 2024 ... when he was in his early 2 (Score:5, Interesting)
Why, is losing your money any less painful if the bad decisions were made by 50 or 60 year oldfags like the management of Lehman Brothers back then?
Greed springs eternal.
I went through the Dot.com bubble. I went through the subprime bubble. I had friends who lost millions almost overnight. Two who managed to do it in both bursting bubbles.
I didn't lose a cent. My investment advisers were some of your "oldfag" archetypes. Except they were remarkably conservative investors for me who played the long game. But the long game isn't glamorous or flashy. It's a slow but accelerating slog. Point is, I now have more liquid money than any of them do now. Especially that poor guy who went from looking at a seriously flush retirement to Social security level living after her lost it all a second time.
So you don't hear a lot about us, you just see the stories about the high rollers, the handful of people that frankly, got very lucky. That inspires the greed in regular people who think they'll do the same. Then it all burns down. But there is always new greed to take the place of the old greed. Almost impossible, people thinking they can get rich quick and fancy themselves wise investors while carrying 3 maxed out credit cards are a great target.
400 percent leverage? in what universe does that even work?
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I didn't lose a cent.
Of course you didn't. Zero multiplied by zero is still zero, zero.
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I didn't lose a cent.
Of course you didn't. Zero multiplied by zero is still zero, zero.
Tell me you read that and didn't get triggered for some obscure reason. Properly managed investments can be quite stable.Now on to what you think I'm doing.
Sorry homie, I'mdoing six figures in retirement, and have untapped investment accounts.
It isn't that difficult. Live within ones means, save and invest sensibly while playing the long game. Have a wife with similar financial outlook. Perhaps this is all not that common?
We live in a world where people take out 30 year mortgages, use multiple maxed
Old technique (Score:5, Insightful)
There is an old technique - the guaranteed winner by random chance:
You get 32 stock brokers. On Monday the boss picks 2 stocks. 16 say that stock is going up, 16 say down, and they each call 100 people and give their prediction. That evening the 16 that were 'right' call their 100 back and brag. Tuesday they repeat only with 8 on each side. Repeat on Wednesday with 4 winners. Thursday they have 2 winners. Friday they have 1 winner that brags to his 100 prospects:
"Look, I happened to predict the winner every day this week. I can not guarantee that will happen every day, but if you want to hear my predictions next Monday, I need you to move your account to my firm."
And the gullible fool does it, not knowing that mathematically the predictions were guaranteed to work on 1 of the 32 brokers. Just math, not competence.
Betting on AI was not some super genius move - especially using margin. All it involved was taking the popular opinion and going all in. While it worked you look like a genius. When it fails, you lose everything.
He just played the odds and won for a while. But the math was never going to have him win forever.
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All it involved was taking the popular opinion and going all in.
Insightful distillation.
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Re: Old technique (Score:4, Informative)
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FWIW, he (and his fund) haven't lost everything. After this recent rout, his fund is still up 80% for far this year (before this huge drop it had been up 400%).
No doubt his risk management is going to be better going forwards. It'll be interesting to see how he does going forwards - his bets to date seem to have consisted of going all-in on everything related to datacenter growth, which was pretty obvious at least as a short term bet. Let's see if he can predict the effect of AI on the economy and continue
This is the canary in the coal mine (Score:3)
Lets fucking go. (Score:2)
\o/ (Score:1)
Really? Wall street lecturing about leverage after destroying the world's economy eighteen years ago?
Kyla Scanlon discussed this ... (Score:2)
Kyla Scanlon [wikipedia.org] had a pretty good explaination [instagram.com] of this on Instagram...
400% leverage = gambling (Score:2)
Awwww... (Score:1)
We should pass around a hat for all those rich people who didn't richer as fast as they expected to.
Where is education these days? (Score:2)
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"The fund employed a risky strategy of borrowing money to purchase stocks." In middle school - 13, 14 years old - we ran a role-playing game to learn how the hollow and foolish technique of margin buying led to complete disaster for investors in 1929. They don't teach that anymore? I mean, how can the fund's participants let this 25 year old idoit lead them down that path?
Financially educated people tend to be extremely susceptible to hype cycles. It starts with curiosity, then falling for the snake oil salesman's promises, then preaching to their clients about the next sure thing as if they'd been indoctrinated into the church of whatever they've been told is impossible to miss. And their financial background leads other finance folks to start to believe, and it grows until it goes ka-fucky and pops. Huurrayy! Educated does not equal not gullible.
Unfortunate tale? It's a feel-good story. (Score:3)
Hedge funds do NOTHING to contribute to society in any way, shape, or form. The fact that this parasitic operation is dying is a feel-good story, not an unfortunate tale.
Markets can remain irrational longer than you can (Score:5, Interesting)
I learnt the old John Maynard Keynes adage "Markets can remain irrational longer than you can remain solvent" the hard way early, luckily not with other people's money and I didn't have much money to lose back then.
Since then I've stuck to Burton Malkiel's advice in A Random Walk Down Wallstreet and kept all my money in index-tracking ETFs and more than recouped my early losses.
A reminder to anyone who thinks they can "logically pick stocks" is Isaac Newton, who besides being history's greatest maths genius was the equivalent of the central bank governor of his day so had lots of insider info, lost his entire fortune playing the stock market.
Keynes, who was a successful investor, simplified it to second guessing popular taste. It's not picking what you think is attractive, but what the general public thinks is attractive. My taste and what people vote for are miles apart, so again ETFs are for me.
Active fund management is obviously a scam: if someone is that good at stock picking, why do they need your money?
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Since then I've stuck to Burton Malkiel's advice in A Random Walk Down Wallstreet and kept all my money in index-tracking ETFs and more than recouped my early losses.
Smart money, and playing the long game.
But there will always be many thinking they can get rich quick.
Active fund management is obviously a scam: if someone is that good at stock picking, why do they need your money?
Depends on the structure. I have people who keep track of what is happening, operating strictly conservative options. They call or send an email, and I decide go/no go. They've done well for me.
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Skim on profit of the fund can exceed what the fund manager can directly make with the investment strategy even if successful. Can't get infinite leverage.
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So that hedge fund was/is as bad as Crypto ! (Score:2)
Whole story? (Score:2)
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He was up 80%, now he's down 67%. The miracle of leverage.
Since he was forced to sell obviously that 13% difference was not on his side. Margin calls are a thing.
No FTX (Score:2)
FTX cost creditors money money and was fraudulent, if all this did is drag down investors who were informed and should have known better with apparently no law broken. Gambling losses at a licensed casino.
Ashenbrenner means cash burner in German (Score:3)
Where's the hedging? (Score:2)
I thought the "hedge" in "hedge fund" meant the investment managers were constantly hedging investment bets. In other words, they would have a lot of bets, some of which would only pay off is other ones did not. For example, take some positions which paid off if gold rose, others which paid if gold fell, and now regardless of what gold does, you make some money. The net result is you get a more consistent return rather than what this fund did, spectacular returns followed by a crater. And with that reduced