CNBC is reporting that Leopold Aschenbrenner’s Situational Awareness fund was forced to sell its public stock holdings to Citadel after heavy losses in the market. It is unclear if the fund sold its stake in Anthropic, a private company. The article also states that Aschenbrenner is engaged to Avital Balwit, who holds a position as Dario Amodei’s chief of staff, but I don’t think this information is relevant in general or to this incident in particular.
From my perspective as an uninformed spectator, I would expect the bets made by Situational Awareness to be positive EV over the long run. The fund has demonstrated incredible performance until this point and I think their portfolio would have continued to perform well. I can only speculate that the fund’s losses were caused by scaling their bet sizing and/or leverage too aggressively.
While I agree there’s reason to think traditional software will decline in the long run and the AI infra buildout will continue, I think this is being too kind to Situational Awareness. Their leverage implies the bet was that this trend will continue nearly monotonically, with the amount of wiggle room they considered possible being miniscule, implied by the amount of leverage relative to their bankroll. Those distinctions are everything in investing—sizing is the bet! In other words, this was a bet on the path AI and traditional software equity valuations would take, not just a bet on their destination.
From Matt Levine’s always excellent Money Stuff newsletter today:
This is a naturally long-term trade. Aschenbrenner’s famous June 2024 essay series is titled “Situational Awareness: The Decade Ahead.” The point is not, like, “SK Hynix will beat earnings expectations next quarter”; the point is stuff like “by the end of the decade, we are headed to $1T+ individual training clusters, requiring power equivalent to >20% of US electricity production.” A lot of people believe this, and a lot of money has been mobilized to bet on it. Tech companies and private credit firms are raising tens of billions of dollars of bonds to build data centers. Frontier AI labs and public AI companies like Alphabet and SpaceX are selling tens of billions of dollars of stock. The way those bonds work is that investors give the data-center builders their money and get paid back over decades as the data centers make money; the money doesn’t have to be repaid for years. The way those stocks work is that investors give the AI companies their money and hope that their stocks become more valuable; they never have to be paid back.
If you are a hedge fund borrowing money from banks to buy AI stocks, the way that borrowing works is, uh, if the AI stocks go down you get margin calls? Like, that day? Your money is not locked up for the long term, and you might have to repay it at any time. There is a mismatch between your thesis, which is measured in decades, and your funding, which is kind of overnight. The AI thesis is up a ton over the past two years, but it is down quite a bit over the past two weeks...
A crude but useful characterization is that Situational Awareness is really really good at thinking about the long-term implications of AI, and Citadel is really really good at thinking about funding risk.[1] So now Citadel owns Situational Awareness’s long-term AI bets.
A crude but useful characterization is that Situational Awareness is really really good at thinking about the long-term implications of AI
If SA had been good at thinking about AI implications, it would have been about the short-term implications: a rapid, monotonic death of SaaS and growth in AI hardware stocks. Their thesis itself demanded the factors that destroyed the fund: urgency, ultraconfident theoretician AI insider managers inexperienced with financial plumbing, the lack of risk management.
Endpoint bets are more common in forecasting than continuous path questions. And I doubt forecasting expertise implies expertise in posing the questions most relevant to a given agenda. Co-manager Carl Shulman is a forecasting expert. It makes me wonder if part of the conversation around whether forecasting is overrated needs to include the possibility it doesn’t just fail to produce benefit, but that forecasting ability misleads when taken as a qualification and is overrated as an “alternative credential.”
But being constructive, it also makes me think that insofar as rationalists/EA are going to keep supporting forecasting, it might be worth putting the emphasis on these more neglected areas of handling continuous, path-dependent forecasts, technique for crafting questions genuinely relevant to specific agendas instead of their convenient-to-resolve and fun-to-think-about proxies, and the reflexivity issues that ensue when there are other reasons to make a public bet or confident public prediction than being right.
I’m not surprised that they got a margin call, but I’m pretty surprised at the size of their losses. The corrections in AI stocks should not have surprised anyone who studied the corrections in, say, Amazon’s big rally in 1998-1999.
I’ve been buying some of the stocks that were down a lot this week: SKHY calls, AAOI, TSEM, AMKR.
It’s not clear to me Situational Awareness made any mistakes. Their returns are high enough (due to leverage) that they can recover from a 50% drawdown within months. The question is whether it’s 50% or 95% and whether anyone will invest with them again.
I agree the general thesis is still good and they should accept occasional 50% drawdowns and it’s not clear (and we’ll likely know more in the future). But this kind of urgent forced liquidation is substantial evidence of poor risk management, I think; I expect with better planning they could have handled the situation better.
If you’re not giving a lot of attention to risk management, I think it’s easy to say, “Look, our investments are up 200% this year! Think of how much more we could’ve made if we’d used even more leverage!”
Getting margin called and selling a significant chunk of holdings isn’t that weird. Selling all their public stock holdings is surprising. Maybe they have a lot of private stock that they can’t sell? Presumably they hold a lot of options on public stocks and the article doesn’t say they sold their options.
But the article also says “The firm had been negotiating to sell its stake in Anthropic”.
It’s mostly a sign that the Situational Awareness Fund was using too much leverage. If you look at an un-levered semiconductor index (SOXX), it’s down ~25% from the peak, but it’s still up nearly 50% for the year.
CNBC is reporting that Leopold Aschenbrenner’s Situational Awareness fund was forced to sell its public stock holdings to Citadel after heavy losses in the market. It is unclear if the fund sold its stake in Anthropic, a private company. The article also states that Aschenbrenner is engaged to Avital Balwit, who holds a position as Dario Amodei’s chief of staff, but I don’t think this information is relevant in general or to this incident in particular.
From my perspective as an uninformed spectator, I would expect the bets made by Situational Awareness to be positive EV over the long run. The fund has demonstrated incredible performance until this point and I think their portfolio would have continued to perform well. I can only speculate that the fund’s losses were caused by scaling their bet sizing and/or leverage too aggressively.
While I agree there’s reason to think traditional software will decline in the long run and the AI infra buildout will continue, I think this is being too kind to Situational Awareness. Their leverage implies the bet was that this trend will continue nearly monotonically, with the amount of wiggle room they considered possible being miniscule, implied by the amount of leverage relative to their bankroll. Those distinctions are everything in investing—sizing is the bet! In other words, this was a bet on the path AI and traditional software equity valuations would take, not just a bet on their destination.
From Matt Levine’s always excellent Money Stuff newsletter today:
If SA had been good at thinking about AI implications, it would have been about the short-term implications: a rapid, monotonic death of SaaS and growth in AI hardware stocks. Their thesis itself demanded the factors that destroyed the fund: urgency, ultraconfident theoretician AI insider managers inexperienced with financial plumbing, the lack of risk management.
Endpoint bets are more common in forecasting than continuous path questions. And I doubt forecasting expertise implies expertise in posing the questions most relevant to a given agenda. Co-manager Carl Shulman is a forecasting expert. It makes me wonder if part of the conversation around whether forecasting is overrated needs to include the possibility it doesn’t just fail to produce benefit, but that forecasting ability misleads when taken as a qualification and is overrated as an “alternative credential.”
But being constructive, it also makes me think that insofar as rationalists/EA are going to keep supporting forecasting, it might be worth putting the emphasis on these more neglected areas of handling continuous, path-dependent forecasts, technique for crafting questions genuinely relevant to specific agendas instead of their convenient-to-resolve and fun-to-think-about proxies, and the reflexivity issues that ensue when there are other reasons to make a public bet or confident public prediction than being right.
I’m not surprised that they got a margin call, but I’m pretty surprised at the size of their losses. The corrections in AI stocks should not have surprised anyone who studied the corrections in, say, Amazon’s big rally in 1998-1999.
I’ve been buying some of the stocks that were down a lot this week: SKHY calls, AAOI, TSEM, AMKR.
It’s not clear to me Situational Awareness made any mistakes. Their returns are high enough (due to leverage) that they can recover from a 50% drawdown within months. The question is whether it’s 50% or 95% and whether anyone will invest with them again.
I agree the general thesis is still good and they should accept occasional 50% drawdowns and it’s not clear (and we’ll likely know more in the future). But this kind of urgent forced liquidation is substantial evidence of poor risk management, I think; I expect with better planning they could have handled the situation better.
They are reportedly up 80% this year even after this loss. This is a better return than any hedge fund listed in this list of best performing hedge funds for 2025, though I’m a bit unclear what a fair reference class is.
Personally, I’m astounded that they apparently kept their leverage at 3X? As the stocks went up, I simply would not have taken out more loans.
If you’re not giving a lot of attention to risk management, I think it’s easy to say, “Look, our investments are up 200% this year! Think of how much more we could’ve made if we’d used even more leverage!”
Getting margin called and selling a significant chunk of holdings isn’t that weird. Selling all their public stock holdings is surprising. Maybe they have a lot of private stock that they can’t sell? Presumably they hold a lot of options on public stocks and the article doesn’t say they sold their options.
But the article also says “The firm had been negotiating to sell its stake in Anthropic”.
Am I naive to think that this is a sign of the Karp-Zitron scenario approaching?
It’s mostly a sign that the Situational Awareness Fund was using too much leverage. If you look at an un-levered semiconductor index (SOXX), it’s down ~25% from the peak, but it’s still up nearly 50% for the year.