SEC Investigates Situational Awareness After AI Hedge Fund's $35 Billion Collapse

SEC Subpoenas Wall Street Banks Over Situational Awareness Collapse

The Securities and Exchange Commission has issued subpoenas to Goldman Sachs, JPMorgan, Citigroup and Bank of America seeking information about their dealings with Situational Awareness, the AI hedge fund that nearly imploded in late July1

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. The SEC investigation focuses on the timing of the fund's trades, its use of leverage, and communications with lenders about borrowed money3

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. Regulators warned the banks to preserve any information regarding the San Francisco-based fund, though Situational Awareness has not been accused of any wrongdoing.

The Dramatic Fall of Leopold Aschenbrenner's AI-Focused Hedge Fund

Situational Awareness plunged from approximately $45 billion to around $10 billion during the late July tech sell-off2

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. The AI-focused hedge fund, led by 24-year-old former OpenAI researcher Leopold Aschenbrenner, was forced to unwind much of its publicly listed portfolio after losses triggered margin calls among its prime brokers2

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. The fund had been using leverage of up to 400%, borrowing about $3 for every $1 of capital it held2

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. Founded just two years ago when Aschenbrenner was 22, the fund operated with only eight employees total, four of them investment professionals4

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How Leveraged Bets on AI Stocks Turned Into Financial Distress

The near collapse of AI hedge fund Situational Awareness stemmed from its concentrated, levered positions in AI infrastructure stocks combined with short positions in traditional software companies3

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. When AI stocks fell in July and older tech names rose, both sides of the fund's book moved against it simultaneously4

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. The fund's publicly disclosed U.S. portfolio was heavily concentrated, with Sandisk and Micron Technology accounting for more than 56% of disclosed U.S. holdings at the end of June5

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. Sandisk stock fell nearly 47% in July while Micron dropped roughly 29%5

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. The fund also held concentrated positions in SK Hynix, CoreWeave, Bloom Energy, Taiwan Semiconductor Manufacturing, and Nebius Group, all of which declined during the selloff2

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Citadel Steps In as Situational Awareness Conducts Fire Sale

Ken Griffin's Citadel purchased Situational Awareness's publicly traded positions at a discount understood to be around 10%2

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. In an investor letter Friday, Griffin said Citadel has since offloaded about 80% of the risk associated with the Situational Awareness portfolio, completing more than 100 block trades worth upward of $4 billion in market value2

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. SK Hynix and CoreWeave have rallied since the fire sale2

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. The fund's backers also absorbed significant losses, with Jane Street losing approximately $15 billion, the worst monthly loss in the trading firm's history4

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Regulatory Scrutiny Highlights Risks of High-Leverage AI Trading

The debacle has cast light on the various ways in which leverage is increasingly underpinning the wider AI boom2

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. The information request does not mean the banks or Situational Awareness have been accused of wrongdoing by the SEC, and such regulatory inquiries can conclude without enforcement action2

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. "It is to be expected that regulators would closely examine any funds that are high profile, produce significant returns, or have particularly dramatic drawdowns," Situational Awareness said in a statement1

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. "We are a highly regulated business and will cooperate to the fullest extent with any regulatory request." The SEC oversees financial markets with an eye toward protecting small investors and has brought civil cases regularly against investment firms that produced large losses3

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Anthropic Stake Remains as Situational Awareness Looks Forward

Situational Awareness held on to its stake in Anthropic through the fire sale, with Aschenbrenner considering selling a $3.5 billion stake in the company but ultimately dumping most of his public book instead4

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. That decision looks increasingly strategic as Anthropic heads for a listing that could value it near $2 trillion3

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. The connection runs deeper than a shareholding: Aschenbrenner married Avital Balwit, the chief of staff to Anthropic chief executive Dario Amodei, earlier this month3

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. Amodei attended the wedding along with the company's top scientist and more than a dozen Anthropic employees, just two days after the fund's collapse4

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. The company, which very publicly hitched its wagon to AI's star, may serve as a cautionary tale about the volatility inherent in concentrated, leveraged bets on emerging technology sectors1

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