The Bank for International Settlements, often described as the central bank for central banks, used its latest quarterly review to warn that financial fragility is building beneath the current AI-driven market enthusiasm. According to the BIS, leverage has risen sharply while the structure of underlying debt has become harder to see, creating conditions that can turn routine volatility into broader stress.
The warning pointed to a July episode involving the Situational Awareness fund, led by Leopold Aschenbrenner. The fund had built a heavy AI-focused position, but a drop in the valuation of its underlying assets triggered a wave of margin calls from banks. To get through the liquidity squeeze, it had to urgently transfer core holdings from its public equity portfolio to Citadel, the investment firm founded by Ken Griffin.
For the BIS, the case illustrates how leveraged hedge funds are becoming deeply entangled with core markets. Frank Smets, head of economic analysis and statistics at the BIS, said cross-market leverage is a growing concern because it can amplify otherwise normal market moves into sharper systemic shocks. The episode, as cited in the BIS review, showed that AI-themed hedge funds are not outside that risk.
The Bank for International Settlements (BIS), often called the central bank for central banks, warned in its latest quarterly review that financial fragility is growing as leverage climbs sharply and the structure of underlying debt becomes less transparent.
The warning was tied to a recent case rather than framed as a theoretical risk. In July, the Situational Awareness fund led by Leopold Aschenbrenner ran into a severe liquidity squeeze after taking heavy exposure to the AI sector. When valuations of the fund’s underlying assets fell, banks issued a series of margin calls. The fund then had to urgently transfer core holdings from its public-market stock portfolio to Citadel, the firm founded by Ken Griffin, to get through the stress.
The BIS said the episode reflects how leveraged hedge funds have become deeply involved in core markets. Frank Smets, the BIS head of economic analysis and statistics, said cross-market leverage is a source of concern because it can magnify ordinary market volatility into sharper systemic shocks. In the BIS view, the near-miss involving an AI-focused hedge fund exposed that risk again.
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