Extreme leverage has killed more brilliant traders’ portfolios than I can keep track of. Think back to Long-Term Capital Management in the late ‘90s, a fund run by Nobel Prize-winning economists who racked up years of huge gains, levered up further, and then watched hubris wipe it all out in a matter of weeks. Fast-forward to last week’s blowup of wunderkind Leopold Aschenbrenner and his fund Situational Awareness, same playbook, different decade: big gains, too much leverage, epic crash.
And while the failure of one hedge fund was a disaster for its clients, a shark came in and took advantage of the situation and the once-big profits.
Situational Awareness, the AI-focused hedge fund run by 25-year-old former OpenAI researcher Leopold Aschenbrenner, had ridden concentrated, borrowed-money bets on AI infrastructure names—SK Hynix (SKHY), Nebius (NBIS), CoreWeave (CRWV), Micron (MU), and Bloom Energy (BE) among them—to a return of better than 439% in the first half of the year. That run pushed the fund’s assets to a peak of roughly $45 billion by early July. The catch: The fund was running as much as 4x leverage on those positions.
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Leverage is a wonderful thing on the way up. On the way down, the math turns brutal fast — at 4x leverage, a 25% decline in the underlying positions wipes out the investor’s entire equity contribution. That’s almost exactly what happened. When the AI/semiconductor trade cracked in July, Situational Awareness’s core holdings fell somewhere between 35% and 47% in a matter of weeks, and its short book in software names like Adobe (ADBE) moved against the fund at the same time. Prime brokers Goldman Sachs, JPMorgan, and Bank of America issued margin calls, and by July 30, Aschenbrenner had no options left. The fund sold essentially its entire public equity book, both longs and shorts, in one shot.
That kind of forced selling isn’t patient or selective, it’s indiscriminate, and it drags down anything the fund owns, regardless of the underlying company’s fundamentals. That pressure is a reason AI and chip names had such a rough stretch heading into that Thursday, as other traders knew Situational Awareness had to sell eventually, so they got ahead of it and sold first.
The turn came Wednesday night into Thursday morning, July 30th, once Situational Awareness actually sold. Ken Griffin’s Citadel—a firm with a long, well-documented history of buying up distressed books from blown-up funds—stepped in and bought the bulk of the portfolio, reportedly around $16 billion worth, in one large block trade, at a discount of roughly 10% to market.
With the forced seller finally out of the market, the pressure lifted almost overnight. Combine that with a blowout Microsoft (MSFT) earnings report the same week, and AI/semiconductor names ripped higher in a hurry. The Philadelphia Semiconductor Index jumped roughly 8.5% in a single session, while the names that had been at the center of the forced selling did even better—SK Hynix jumped as much as 30%, Nebius rallied more than 30% off its lows, CoreWeave surged close to 20%, Bloom Energy popped as much as 40%, and Micron climbed about 15%. The Nasdaq itself gained nearly 3% on the day. All told, the AI sector had shed something like $3 trillion in market cap during the July unwind, and a meaningful chunk of that came back in the days that followed.
This was a massive win for Citadel, which had bought the low and reported a gain in July of more than 6%, which was the best returns for a large hedge fund that month.
This is not the first time Citadel has shown up to buy the wreckage of an overleveraged fund at a discount.
Go back to 2006 and Amaranth Advisors, a $9 billion multi-strategy fund that lost roughly $6 billion, or about 65% of its assets on a concentrated, leveraged bet in natural gas futures. When the fund couldn’t meet its obligations, it transferred its entire energy book to Citadel and JPMorgan Chase, reportedly at something like 50 cents on the dollar. Citadel didn’t just pick up positions; it absorbed talent out of the wreckage too.
A year later, in 2007, Sowood Capital ran into trouble as the early credit crisis hit its portfolio. Citadel assembled a team and made an offer for Sowood’s distressed assets at 3:30 in the morning, when other potential buyers had already gone home for the night. The deal closed, and Citadel walked away with the book.
And in 2021, during the GameStop short squeeze, Citadel and Point72 jointly injected $2.75 billion into Melvin Capital to keep it from collapsing outright, a slightly different structure, a capital injection rather than a portfolio purchase, but the same underlying instinct: When a leveraged competitor is in trouble, show up with cash and be the buyer of last resort, on your own terms.
For his part, Aschenbrenner didn’t dodge responsibility for the drawdown. In a letter to investors, he wrote plainly, “We let you down this month,” calling the losses “very expensive scars” while framing them as lessons for the fund going forward. Situational Awareness still owns a large private stake in Anthropic and remains up roughly 80% on the year, even after the July damage, but the leverage, and the public stock book that came with it, is gone.
Extreme leverage kills!
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