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A hedge fund named after a concept in AI safety nearly became a case study in financial danger. The Bank for International Settlements pointed to the near-collapse of Situational Awareness, the AI-focused fund founded by former OpenAI researcher Leopold Aschenbrenner, as a textbook example of what happens when leverage meets concentration risk in volatile markets.
The BIS issued its warning on September 14, 2026, roughly six weeks after the fund’s portfolio cratered by 67% during a brutal selloff in AI and semiconductor stocks. At its peak, Situational Awareness managed approximately $45 billion in assets. By the time the dust settled, that figure had shrunk to around $10 billion.
How a $45 billion fund almost vaporized
Situational Awareness launched in 2024 with a thesis that was, at the time, hard to argue with: go long on AI infrastructure and semiconductor companies, and go long aggressively. The fund ran concentrated positions with roughly 4x leverage, meaning every dollar of investor capital was backing four dollars of market exposure.
When AI-related equities broadly turned south in July 2026, that leverage transformed a painful drawdown into a near-death experience. Major prime brokers, including Goldman Sachs and JPMorgan Chase, issued margin calls that the fund couldn’t cover with its existing liquidity.
On July 30, 2026, Situational Awareness sold approximately $16 billion worth of assets to Citadel in what amounted to a fire sale. The transaction eliminated the fund’s leverage entirely. A 67% decline in portfolio value left investors staring at losses that would make even the most seasoned allocators flinch.
JPMorgan subsequently scaled back its lending relationship with the fund. Situational Awareness has since brought on Clear Street as a new prime brokerage partner.
The BIS connects the dots
The BIS has repeatedly cautioned that hedge funds, private credit vehicles, and other non-bank financial intermediaries now occupy positions in markets that can amplify shocks in ways regulators struggle to monitor. Situational Awareness offered a live demonstration. A single fund’s margin calls forced $16 billion in assets onto the market in a compressed timeframe, the kind of forced selling that can cascade through correlated positions held by other market participants.
The parallels to past episodes are hard to miss. Archegos Capital Management’s implosion in 2021 resulted from similar dynamics: concentrated positions, heavy leverage, and prime brokers who didn’t fully appreciate their collective exposure. The key difference is that Situational Awareness managed to survive, albeit in diminished form, while Archegos did not.
Regulators are circling
The SEC has issued subpoenas to Wall Street banks as part of an investigation into the leverage and trading practices surrounding Situational Awareness. The probe suggests regulators are interested not just in the fund’s behavior, but in how its lenders facilitated the buildup of risk.
Investors in leveraged funds face their own reckoning. A 67% drawdown, even one that doesn’t result in total loss, fundamentally changes the risk calculus for allocators. The math of recovery is unforgiving: a fund that drops 67% needs to roughly triple just to get back to its starting point.
Situational Awareness continues to operate, which is more than can be said for many funds that have found themselves in similar positions. Whether it can rebuild from $10 billion in AUM while navigating SEC subpoenas, diminished prime brokerage relationships, and a BIS report that essentially uses its name as a warning label remains an open question.
Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.
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