After the margin call blowout, capital is instead flocking to the "AI stock market guru"

Leopold Aschenbrenner's hedge fund Situational Awareness suffered a full position liquidation, but instead of scaring off investors, this crisis sparked a new wave of frenzy in Silicon Valley.

According to Bloomberg's report on August 8, people familiar with the matter revealed that within just a few days after the fund's liquidation, a large number of Silicon Valley investors took the initiative to contact Situational Awareness to express their willingness to make additional investments. Pat Grady, partner at HSG, publicly stated that he will remain an important figure in Silicon Valley for the long term.

Wall Street CN previously wrote in an article that Aschenbrenner himself has admitted his mistakes in a letter to investors, announced the elimination of all leverage, and defined this crisis as a "costly but invaluable lesson". Earlier, in the face of margin calls from financiers, Situational Awareness urgently sold most of its stock positions to Citadel under Ken Griffin at a discount of more than 10%. The fund's remaining portfolio (including private equity investments) is currently worth about 10 billion U.S. dollars. Despite the heavy losses, the fund still recorded a positive return of about 80% this year.

This incident has fully exposed the deep rift between Silicon Valley and Wall Street. Wall Street regards this as a classic case of a popular AI figure paying the price for excessive leverage; while Silicon Valley's reaction is completely the opposite — many investors see it as a "buy the dip" opportunity and continue to stand by this investor who used to be a researcher at OpenAI. At present, Situational Awareness has informed investors that it will not accept new funds for the time being, but the enthusiasm from the outside world has not faded.

01

Silicon Valley's Full Support: Hero Narrative Overrides Risk Warnings

The experience of the fund's liquidation has not become a stain in Silicon Valley, but instead strengthened Aschenbrenner's "hero persona".

Logan Bartlett, Managing Director of venture capital firm Redpoint Ventures, said bluntly: "There is a hero archetype here. Leopold took a punch, but it instead aroused everyone's solidarity." Senior venture capitalist Elad Gil even publicly announced that he is applying to invest in Aschenbrenner's fund for the first time.

Pat Grady, partner at HSG, said in an interview on Bloomberg TV on Thursday when asked about the turmoil of Situational Awareness:

"Our judgment is that he will be an important figure in Silicon Valley for the long term."

Gygmy Gonnot, Adjunct Professor at New York University Stern School of Business and Managing Director of Focus Investment Group, gave a structural explanation for this divergence:

"Silicon Valley rewards those who make correct judgments on transformative technology directions, while Wall Street rewards those who generate considerable risk-adjusted returns while preserving principal."

02

Wall Street's Doubts: Old Problems of Leverage and Concentration

For Wall Street, the near-collapse of Situational Awareness is not surprising, as it is an old story that has repeatedly played out in the hedge fund industry.

From the collapse of Long-Term Capital Management (LTCM) in the late 1990s to the liquidation of Archegos Capital Management, excessive borrowing is almost the common footnote of every disaster.

According to reports, S3 Partners founder Bob Sloan pointed out directly on Bloomberg TV on Tuesday:

"To be clear, these are super concentrated positions, super crowded positions, and at the same time super high-leverage positions."

From the very beginning, some Wall Street institutions have held reservations about Aschenbrenner's fund. Unlike similar funds, the contributors to Situational Awareness are mainly wealthy individuals and family offices in the San Francisco Bay Area, rather than pension funds and sovereign wealth funds that usually invest in mature funds.

According to previous Bloomberg reports, the prime brokerage division of Barclays rejected Situational Awareness as a client several weeks before the fund's collapse, on the grounds that its exposure to a single industry was too concentrated.

The report states that people familiar with the matter revealed that Morgan Stanley also refused to provide prime brokerage services for Aschenbrenner at the initial stage of the fund's establishment on the grounds of his lack of experience. However, the above-mentioned sources said, Morgan Stanley has since changed its stance and plans to bring the fund on board as a prime brokerage client in the coming weeks.

Goldman Sachs, JPMorgan Chase and Bank of America have provided leverage to Aschenbrenner's fund.

03

AI Track: A High-Return Game Under High Volatility

The AI-focused hedge fund track where Situational Awareness is located is itself a field where high volatility and high returns coexist.

The team of competitor Value Aligned Research Advisors includes many senior professionals from BlackRock and Hudson River Trading, with assets under management exceeding 26 billion U.S. dollars as of the end of June. According to an investor document seen by Bloomberg, the AI fund under the firm recorded a return of about 194% as of June this year, far exceeding the nearly 10% increase of the S&P 500 index in the same period.

The AI stock sell-off last month spread widely, and even the largest hedge funds were not spared. According to Bloomberg reports, multi-strategy giant Millennium Management fell 2.1% in July, Point72 Asset Management fell 3.3%, and the relatively concentrated hedge fund Altimeter Capital Management plunged 11% last month.

It is worth noting that some funds with positions similar to Situational Awareness have detected risks in advance. According to reports, a person familiar with the matter revealed that one of these funds set up hedging positions in advance out of concern that Aschenbrenner's fund would be forced to sell off assets.

04

After Deleveraging: The Road to Reconstruction Still Requires Wall Street

After the crisis, the core challenge facing Aschenbrenner is how to re-find a balance between two completely different worlds.

He stated in the letter to investors that all leverage of the fund has been eliminated, and he no longer uses bank prime brokerage services to amplify bets for now at least. He wrote:

"These are costly scars, but I am committed to ensuring that they will become invaluable lessons for our institution and myself as we move forward."

However, if he wants to reproduce the high returns from earlier this year, Aschenbrenner eventually still needs to convince Wall Street to provide him with leverage again. This means he must find a sustainable path between the enthusiastic support of Silicon Valley and the strict risk management requirements of Wall Street.

This article is from the WeChat official account "Wall Street CN Max", author: Dong Jing, published with authorization from 36Kr.