Last night, a major event shook the stock market, becoming a key lesson for capital markets in the AI era. Leopold Aschenbrenner’s hedge fund, Situational Awareness, faced a forced sale of all its stocks following heavy selling pressure on AI shares over recent days.
Previously, Leopold Aschenbrenner grew his fund from an initial few hundred million dollars to several billion, mostly investing in AI infrastructure stocks that he personally viewed as the most critical sector in the race to develop AI models and the future’s most in-demand industry.
Leopold Aschenbrenner is a former OpenAI employee known for his research and market analysis emphasizing that Safety is paramount as tech companies pursue AGI—artificial general intelligence with human-level capabilities.
He later published a 165-page research paper titled Situational Awareness: The Decade Ahead, explaining that AI’s essential needs are infrastructure such as energy, data centers, chips, and processing power. This theme became the core investment focus of his fund.
Initially, this strategy was highly successful. Financial Times reported the fund achieved returns up to 439% in the first half of this year, earning Leopold the nickname “the AI era prophet.”
However, the real market situation has deviated from his theory, as the AI market cycle proved uncertain. This marked a major reversal; just months ago, his fund was considered a rising star in investment circles.
After being heavily hit by AI stock sell-offs worldwide, Situational Awareness faced severe pressure and urgently consulted with several investors on Wednesday night to find ways to sell some assets.
Within less than 24 hours, Citadel, one of the world’s largest hedge funds managed by billionaire Ken Griffin with assets over $71 billion, agreed to purchase most of Leopold Aschenbrenner’s publicly traded stocks, leaving only private assets such as a $5 billion stake in Anthropic to the original fund.
Citadel is known for deploying massive capital to buy assets amid market volatility or heavy sell-offs. Their purchase of Situational Awareness’s portfolio happened during weeks of steep declines in AI stocks.
Initial reports from Financial Times stated that Situational Awareness, with a concentrated AI stock portfolio, negotiated with investors to sell assets or raise additional funds. The fund also used leverage—borrowed money to amplify returns—which proved a double-edged sword, rapidly increasing profits in bullish markets but becoming a vulnerability when tech stocks corrected.
On Wednesday, Situational Awareness ended negotiations with some smaller investors and accelerated closing a deal with a single large buyer to complete asset sales quickly and minimize losses.
Besides Citadel, several other large hedge funds like Millennium Management joined the talks, while Goldman Sachs and JPMorgan Chase, acting as prime brokers for Situational Awareness, also participated in the portfolio sale discussions.
The surprising aspect of Leopold Aschenbrenner’s case is that just days before the crisis, he sent a positive letter to investors revealing the fund had generated 439% returns from the start of the year through June, inviting investors to increase their stakes.
“At times, we tell investors this could be a particularly good opportunity to add to their investments if they’re waiting for a chance,” Leopold stated in the letter, allowing investors to add funds starting August 1.
Regulatory filings at the end of Q1 showed the fund’s top holdings included Nebius Group, Sandisk, Micron, and CoreWeave, all of which fell more than 35% within one month.
Before the market correction, the fund’s assets reached $45 billion in early July. Then the crisis hit, with Situational Awareness suffering significant losses over recent weeks. CNBC reported losses on both long and short positions.
Nonetheless, Situational Awareness will continue operating as a private investment firm. This episode serves as a costly lesson for the young, ambitious investor previously dubbed the “AI industry prophet” due to the fund’s massive profits during the AI stock boom.
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Interestingly, the recent sell-off may not be due to investors losing faith in AI. One theory points to heavy selling of memory chip stocks in South Korea since June, triggering margin calls for many investors.
A margin call occurs when investors borrow money to buy stocks, but if prices fall too much, brokers demand additional funds or force asset sales to cover debts. The problem is many South Korean investors used borrowed money to invest in AI stocks.
As stock prices dropped, investors had to sell shares to raise collateral, further pushing prices down and triggering more margin calls. This cycle accelerated selling across AI stocks, including many held by Situational Awareness, directly impacting the fund.
Therefore, no matter how much Leopold Aschenbrenner believes in AI’s future, it was irrelevant because the market forced him to sell on its terms. This selling pressure caused heavy losses, and with leverage involved, he had to gradually reduce positions to repay debt.
Yet, once forced sellers exited, the affected stocks rebounded quickly. After news that Citadel acquired Situational Awareness’s portfolio, AI stocks like Sandisk and Nebius surged sharply.
Many investors believe one major forced seller has left the market, easing downward pressure on prices, explaining why stocks Leopold trusted most recovered after he was forced to sell.
This event became one of the harshest realities of financial markets, reminding many of Charlie Munger’s words.
“Smart men go broke 3 ways: Liquor, Ladies and Leverage.”No matter how smart, one can lose everything through three things: alcohol, women, and leverage.
Sometimes you may correctly foresee major global shifts, deeply understand industries, and build the right portfolio, but if you overleverage and overbet with confidence,
the market will not judge whether your idea is right or wrong, nor how smart or theoretical you are. Instead, it will decide simply if “you survive long enough to prove it.”
Source: Financial Times [1][2],CNBC,Business Insider
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