Leopold Aschenbrenner’s hedge fund, Situational Awareness, attracted fresh investor interest just days after its blowup, with Bloomberg reporting on Aug. 8 that a large number of Silicon Valley investors reached out to the firm to express interest in adding capital.
The renewed demand came even after the fund’s crisis became public. Sequoia Capital partner Pat Grady said publicly that Aschenbrenner would remain an important figure in Silicon Valley over the long run.
Investors came in after the fund’s crisis
Wall Street CN had previously reported that Aschenbrenner acknowledged mistakes in a letter to investors and said he had removed all leverage. He described the episode as a “costly but invaluable lesson.”
After receiving margin calls from financing providers, Situational Awareness urgently sold most of its stock holdings to Ken Griffin’s Citadel at a discount of more than 10%. The fund’s remaining portfolio, including private investments, is valued at about $10 billion. Despite the damage, the fund is still up about 80% this year.
Situational Awareness has told investors it is not accepting new capital for now, but outside interest has not faded.
Silicon Valley kept backing Aschenbrenner
In Silicon Valley, the blowup did not become a lasting stain. The report said it instead strengthened Aschenbrenner’s image among supporters.
Redpoint Ventures managing director Logan Bartlett said, “There’s a heroic archetype here. Leopold got punched in the face and it made everybody rally around him.”
Veteran investor Elad Gil also said publicly that he was applying to invest in Aschenbrenner’s fund for the first time.
Asked about the turmoil at Situational Awareness during a Bloomberg Television interview on Thursday, Pat Grady said: “Our view is that he will be an important figure in Silicon Valley over the long term.”
Gygmy Gonnot, an adjunct professor at NYU Stern School of Business and managing director at Focus Investment Group, offered a structural explanation for the divide. “Silicon Valley rewards people who are right about transformative technology directions, while Wall Street rewards people who preserve capital while generating attractive risk-adjusted returns,” Gonnot said.
Wall Street focused on leverage and concentration
For Wall Street, the near-collapse of Situational Awareness fit a familiar hedge fund pattern. The report pointed to cases from Long-Term Capital Management in the late 1990s to the collapse of Archegos Capital Management, where excessive borrowing was a common feature.
S3 Partners founder Bob Sloan said on Bloomberg Television on Tuesday: “Let’s be clear, this is a super concentrated position, a super crowded position, and also a super leveraged position.”
Some Wall Street firms had reservations about the fund from the beginning. Unlike many peer funds, Situational Awareness was backed mainly by wealthy individuals and family offices in the San Francisco Bay Area, rather than pension funds and sovereign wealth funds that more often invest in established managers.
Bloomberg had previously reported that Barclays’ prime brokerage unit declined to take Situational Awareness on as a client weeks before the fund’s collapse, citing overly concentrated exposure to a single sector.
According to the report, people familiar with the matter said Morgan Stanley also refused to provide prime brokerage services when the fund was launched, citing Aschenbrenner’s limited experience. Those people added that Morgan Stanley later changed its position and planned to onboard the fund as a prime brokerage client in the coming weeks.
Goldman Sachs, JPMorgan Chase, and Bank of America did provide leverage to the fund.
AI-focused hedge funds have posted big gains and sharp swings
The AI-focused hedge fund segment where Situational Awareness operates is marked by both high volatility and high returns.
Its competitor, Value Aligned Research Advisors, includes senior professionals from BlackRock and Hudson River Trading. As of the end of June, the firm managed more than $26 billion in assets. A Bloomberg-reviewed investor document showed that its AI fund returned about 194% through June this year, well ahead of the S&P 500’s gain of nearly 10% over the same period.
Last month’s selloff in AI stocks hit broadly across the sector, including some of the largest hedge funds. Bloomberg reported that Millennium Management fell 2.1% in July, Point72 Asset Management dropped 3.3%, and the more concentrated hedge fund at Altimeter Capital Management lost 11% for the month.
The report also said some funds with holdings similar to Situational Awareness had identified the risk in advance. According to one person familiar with the matter, one such fund built hedges early out of concern that Aschenbrenner’s fund could be forced into sales.
After deleveraging, the road back still runs through Wall Street
In his letter to investors, Aschenbrenner said the fund had removed all leverage and was no longer using bank prime brokerage to amplify bets, at least for now.
He wrote: “These are costly scars, but I am committed to making sure they become invaluable lessons for our institution and for me as we move forward.”
Still, if Aschenbrenner wants to recreate the stronger returns seen earlier this year, he will ultimately need to persuade Wall Street to extend leverage again. That leaves him trying to balance Silicon Valley’s enthusiasm for his AI thesis with Wall Street’s stricter demands on risk management.