Situational Awareness and the Impending Stock Market Volatility
emergingtrajectories.com
emergingtrajectories.com
I don't understand how the investors didn't realize this was going to blow up. Returns like that are not asymmetrical and can only be produced with leverage, at least when you're trading paper.
When something is inevitable and there is a large enough position, this makes adversarial attacks likely. Every small drop causes an amplified amount of pain to the investor which causes them to liquidate positions furthering the decline. SA doesn't have the history or relationships yet to endure margin calls.
I don't see the edge these companies have when they're just going long a very particular position, namely anything related to AI. Long term value in finance is made in a couple of ways. For instance, relationships & being able to source deals (lots of PE firms), short term trading infrastructure and knowledge (Renaissance), capital and clout to make favorable deals (Buffet), etc. Even then the skills are fleeting as employees leave taking knowledge and companies raise money to compete.
Buying Nvidia on leverage is not a long term strategy. Especially when all your investments are common stock and obvious.
The whole country of South Korea is long SK Hynix and Samsung, with insane level of leverage. That won’t be a happy ending. People talk about past bubbles as if it was a good thing long term, but that will be millions of people losing their savings, homes, decades of austerity for countries to recover
Definitely not true, looking at their last 13f (filed in may 2026) their top3 holdings were BE, SNDK and CRWV which had 1y returns of 1,500%, 2,000% and 500% at the time of the filing. They accounted together for 15% of the fund (plus an unknown amount of exposure through options). These tickers show up in the 2 and 3 previous filings so they had exposure to some of that run up, and looking at the filings further back they had some very concentrated exposure to INTC in a half year period where the stock went up about 200%
Aschenbrenner obviously understood diversification, but was overconfident and greedy and used leverage to boost returns. He was lucky that Citadel saw fit to step in and buy their portfolio rather than having to dump it into the market which would likely have been far worse.
Any sophisticated investor that read that a fund they were invested in a single name would be upset. Unless it's a special vehicle or they're activist and have a position for some strategic purpose. But just to let such a large percentage of your fund on a single name stock is insane.
I'll also add that options are essentially leverage. Leverage doesn't have to be borrowing it's just describing what $1 price change does to your position. You can buy at the money calls for 3-12% of the stock price. And they move up slightly less than $1 if stock goes up, so you're essentially getting 10-20x leverage. And if they're not above the strike price at expiration they're worthless
https://whalewisdom.com/filer/situational-awareness-lp
Or perhaps this was more of an attempt to lock in some profits while still riding it higher? It seems most of his puts were in the chip stocks while his portfolio was more focused on "next phase" datacenter/infra stocks.
That's not generally true. There are sometimes highly asymmetrical strategies driven by market inefficiences that are not widely known. They're not easy to find though.
https://medium.com/@trendguardian/rigged-networks-1d5ad5c6f8...
The problem was leverage - the decline in these stocks seems to have resulted in margin calls that he could not meet, resulting in forced selling. There was a very brief story that he was looking to raise additional funds, but within 24 hours he had sold much of it to Citadel instead, and for time being now holds an entirely unleveraged stock-only portfolio.
https://www.businessinsider.com/leopold-aschenbrenners-lette...
In the case of Amazon they'd have had the opportunity to buy at 97% discount compared to ATH
>Returns like that are not asymmetrical and can only be produced with leverage
This is simply untrue. Just because the path to doing so is much more clear in hindsight doesn't mean it wasn't possible.
Sandisk is still up 110.82% in the last 6 months, and that's after a drawdown that's now approaching 50% from peak. Over the last year, they're up 2730%, and again, this is after the drawdown. Zero leverage.
No doubt he has learnt a valuable lesson.
Many famous investors, such as George Soros, have had huge losses at some point in their career, but have taken in in their stride and still done well. If you are taking big swings then sometimes you will have big misses.
What I said was strictly a refutation of the assertion that it's only possible to achieve a 47% return in 6 months or 400%+ return in ~2 years with leverage. That's a demonstrably false assertion.
If you bought Sandisk, $SNDK, not options but the actual underlying equity, with no margin, just fully purchased the position with cash, you're up 110% if you bought six months ago (down from over 200%, but 110% in 6 months is still enormous), and you're up over 2700% if you bought a year ago.
If I were a betting man, I'd bet that Citadel was also selling to Situation Awareness while they were on the way up. At some point, SA had juiced their stock prices so much that no "rational" investors (those that have a view of the stock based on some amount of fundamentals) would be on the other side of the trade. It's retail investors, bandwagon investors, and Citadel-caliber funds. This situation (over-leveraged company blows up due to some volatility) happens all the time in commodities trading, which is where Citadel started.
OTOH, perhaps there was also a self-serving element of avoiding market contagion that could have occurred if SALP had instead been forced to sell into the market.
Contrary to popular belief these people know what they are doing.
1. SA wants to buy stock with leverage. You do that through a major bank via total return swaps. Essentially, SA pays X% of the value on $100 of stock (for 4x leverage you'd pay $25) plus an ongoing financing fee (call it 5% a year), then you get the return/loss on that $100 of stock. SA was in these agreements with JPMorgan and Goldman Sachs.
2. The bank, because they don't want to actually hold that risk, goes out and buys $100 of stock.
3. Citadel and others see JPMorgan buying lots and lots of this stock. That's confusing, because normally JPMorgan wouldn't be making a huge directional bet on a stock. They deduce that a large fund is buying the stock.
4. Citadel starts widening their spread (the difference between what they'll buy a stock for and what they'll sell it for). They hedge some of this as best they can, or temporarily live with the risk.
5. SA, the highly leveraged fund buying volatile stocks, inevitably blows up because volatile stocks swing around in price. A dip causes margin calls.
6. JPMorgan or Goldman need to sell the stock fast, because SA is close to dipping below their required margin (i.e. SA paid $25 for $100 in stock exposure, the stock drops to $90, JPMorgan asks for more money because the stock went down by too much).
7. Citadel offers to buy all of the stock from JPMorgan. Because they're doing it in one big block, JPMorgan doesn't lose money selling on the open market (once you start selling, each successive sale is for less money because there are more people selling than buying). Citadel is compensated for this by getting a discount to the asset value (the stock is worth $90, Citadel gets to buy it for $81).
So Citadel didn't do anything to "set up" SA. But because they're hyper-aware of market dynamics, they would have known that someone is going to need to sell stock if the market takes a turn on these names.
I've been paying for order-level data feeds on stocks and one thing you'll find is that a lot of the 'sensitive' trades will be anonymized or broken down in different ways to obfuscate who is trading. Citadel would still be able to see there's a surprising level of interest in a certain stock but might not be able to deduce it's one actor. A broker working for SA should know they need to do this, as it helps the broker do better via commissions, etc. too.
My understanding is that Citadel negotiated directly with SA to buy the book, so the final trades were likely taking place outside of the formal market feeds.
So JPMorgan/Goldman prepare all the info on the book and start calling institutional investors after the market closes. The funds and banks prepare bids, there's some negotiation, and the block is finalized before trading opens the next day.
Speed does matter, but you're only calling investors you know "can" close the deal (i.e. they'll have enough capital to buy it all that day/night). So it's more of a price question than a speed one at that point?
And really, nobody wants the downward spiral of a fire sale in the tech sector. Someone will make money on that chaos, but it's a lot of risk when you can lock in a discount with the block trade.
The interesting part what this article states: SA was essentialy a thematic ETF without any hedging to buffer downside, and got margin called.
SA weren't geniuses, they weren't sophisticated. They just did the same thing everyone else did, all in on semi-conductor, AI and memory positions. They got great returns because 1) everyone got great returns and 2) they were leveraged through their ears. In fact, not only they weren't geniuses, they were pretty bad at risk management, so bad that the first mild drawdown triggered margin calls on their over-leveraged bets and they couldn't cover them.
TLDR: SA didn't have alpha, they just looked good through over-leveraged beta and got caught
What guys like Leopold either don't understand or understand but ignore is that being right directionally and being right on market timing are two different skillsets. When you've juiced a stock by 800%, the existence of alpha pales in comparison to your vulnerability to the stock market.
He unfortunately got caught with his pants down.
Stopped writing the comment, went and clicked the logo, yup a personalized AI reporting service.
All the stuff that it was forced to sell to Citadel is also up ~10%-30% since the sale
and Citidel took it all at a multiple billion dollar discount to the prior close