The headquarters of the US Securities and Exchange Commission in Washington, D.C. [Reuters]
The headquarters of the US Securities and Exchange Commission in Washington, D.C. [Reuters]

Situational Awareness, the AI-focused hedge fund that rose to prominence on Wall Street by riding the artificial intelligence investment boom, has come under scrutiny from the US Securities and Exchange Commission after a sharp selloff in AI-related stocks last month pushed the fund to the brink. The SEC has demanded documents from major Wall Street banks that provided the fund with heavy leverage, examining the trades that triggered margin calls and the scale of its borrowing.

The SEC recently issued subpoenas to Goldman Sachs, JPMorgan Chase, Citigroup and Bank of America — all banks that had done business with Situational Awareness — according to Reuters and the Financial Times on Monday (local time).

The documents requested include records of trades the fund made just before it suffered massive losses, as well as communications between the fund and the banks. Regulators are also examining what discussions took place between Situational Awareness and its lenders regarding the leverage it used to build up its positions.

Leopold Aschenbrenner, founder of hedge fund Situational Awareness. [Social media]
Leopold Aschenbrenner, founder of hedge fund Situational Awareness. [Social media]

Situational Awareness is an AI-focused hedge fund founded in 2024 by Leopold Aschenbrenner, a former OpenAI researcher. Aschenbrenner built his reputation with writings predicting the rapid advancement of AI, and the fund drew Wall Street attention by concentrating its investments in AI and semiconductor stocks.

The fund pursued an aggressive leveraged strategy — borrowing heavily to amplify its bets — during the AI bull run. But the situation reversed sharply last month when AI and semiconductor stocks tumbled. According to materials the fund shared with investors, its portfolio lost 67% of its value in July alone.

As falling share prices eroded the value of collateral, margin calls from lenders piled up. Situational Awareness ultimately sold most of its listed shares in an emergency sale to Citadel, the hedge fund led by Ken Griffin. Citadel acquired the portfolio at roughly a 10% discount, the Financial Times reported.

Citadel then unwound more than 80% of the risk it had taken on in just three weeks, offloading more than $4 billion worth of shares through roughly 100 block trades. A fund that had reaped strong gains by betting on the AI rally was forced into a fire sale almost overnight when the market turned.

The SEC investigation is also drawing attention for what it reveals about how high-risk leveraged strategies at hedge funds were intertwined with major Wall Street banks. Hedge funds can borrow from prime brokers such as banks to boost returns, but when prices move against them, losses can mount just as quickly.

The inquiry is currently at an early information-gathering stage, and no determination has been made that Situational Awareness or any of the banks involved engaged in wrongdoing. A document request does not necessarily lead to sanctions or penalties. The SEC, Goldman Sachs, JPMorgan Chase, Citigroup and Bank of America all declined to comment.

Situational Awareness said in a statement that it is natural for regulators to scrutinize funds that have attracted significant attention, posted strong returns, or experienced sharp losses. "As a heavily regulated firm, we will cooperate fully with all regulatory requests," it said.


sjy@heraldcorp.com