The First Great AI Fund Blowup Just Became an SEC Investigation

The AI Prism Admin — Fri, 28 Aug 2026 10:00:00 +0000

The Securities and Exchange Commission has subpoenaed Goldman Sachs, JPMorgan, Citigroup and Bank of America over their role in the near-collapse of the AI hedge fund Situational Awareness, according to CNBC, citing Reuters. The banks haven’t been accused of anything. But the subpoenas — which seek the fund’s trades, its leverage and its communications with lenders — mark the first time a marquee AI-finance blowup has reached the enforcement stage.

The fund in question went from roughly $45 billion under management to about $10 billion in a matter of weeks in late July (CNBC). Its 25-year-old founder, former OpenAI researcher Leopold Aschenbrenner, was forced to hand his entire public stock portfolio to Ken Griffin’s Citadel at a discount understood to be around 10% (CNBC).

Here’s the part that matters: this wasn’t a story about the AI failing, the models underdelivering, or the technology being a fraud. It was a story about leverage of up to 400% (CNBC), a concentrated bet on a single thesis, and a momentum crash the major indexes barely registered. The SEC isn’t investigating the AI. It’s investigating the plumbing.

Here’s what the fund was, what actually happened in July, why the subpoenas went to banks rather than the fund — and why this moment is about to become the template for how regulators police the AI trade.

A 25-Year-Old Built the Fastest-Growing Fund on Wall Street

Aschenbrenner is German-born and had no prior trading experience when he launched the fund in 2024 (TechCrunch). He became famous for a different reason first: his 2024 essay Situational Awareness: The Decade Ahead, which argued that scaling AI would require a historic build-out of semiconductors, compute, memory and power (the essay). Before the fund, he’d been on OpenAI’s superalignment team, until he was dismissed over what the company described as an improper disclosure of internal information (TechCrunch).

The résumé was the pitch: Columbia valedictorian at 19, enrolled at 15 (TechCrunch). So was the performance. The fund returned 439% through June of this year, per the Financial Times (TechCrunch), and peaked at an estimated $45 billion in assets (CNBC).

The early backers read like a who’s who of AI-adjacent capital: quant giant Jane Street, Stripe co-founders Patrick and John Collison, and former Meta executives Daniel Gross and Nat Friedman (TechCrunch). They weren’t betting on a traditional hedge fund. They were betting on the thesis — that AI infrastructure was the trade of the decade.

The Trade: Chips Long, Software Short, Four Times Leverage

Situational Awareness ran one of Wall Street’s most crowded trades with a twist. On the long side sat concentrated positions in the companies expected to supply the AI build-out: memory maker SK Hynix, neocloud CoreWeave, storage maker SanDisk, plus Nebius, Bloom Energy, SharonAI and IREN, per public filings as of March 31 (CNBC).

On the short side: software names like Adobe, on the theory that AI would eat their moats (CNBC). The structure looked like a natural hedge — AI winners long, AI losers short. Then came the leverage.

CNBC reported the fund ran on leverage of up to 400% (CNBC), and the Wall Street Journal reported an options overlay — a so-called “Texas hedge” of long stock against short calls — that capped upside while amplifying downside (WSJ).

It was also the consensus trade. Over 80% of fund managers in Bank of America’s monthly survey named “long global semiconductors” the most crowded trade in the market (The Economist). When everyone’s in the same boat, the boat doesn’t have to sink — it just has to rock.

A Momentum Crash the Indexes Never Showed

Here’s the counterintuitive part: the S&P 500 was near record levels while Situational Awareness was being destroyed (CNBC). The damage was hidden inside one of the fastest reversals in market history — “the largest/fastest momentum crash in modern history,” per BTIG’s chief market technician Jonathan Krinsky (CNBC). Morgan Stanley’s sector-neutral Momentum Index tumbled 17.4% in four trading days — its worst such decline on record, worse than the dot-com bust, the pandemic shock and 2022 (CNBC).

The fund’s longs fell 50% to 78% from their peaks by July 29, while its short leg — software — rallied (CNBC). Both sides lost at once. The hedge didn’t hedge.

The AI trade had been faltering since June — even with major indexes flat, two of the fund’s biggest longs, SanDisk and Bloom Energy, tumbled more than 50% (CNBC). Margin calls followed, then forced selling, then a deleveraging spiral: a shrinking equity cushion, more collateral demanded, more positions dumped into a falling tape (CNBC). The fund’s July 24 letter called the selloff the best buying opportunity since early last year and invited fresh capital from August 1 — the appeal drew less than hoped, per Bloomberg (TechCrunch).

It was a liquidity crisis, not a returns crisis: down 67% in July, the fund was still up about 80% on the year (WSJ). In its investor letter, the fund blamed short sellers and compared the episode to a bank run (WSJ via HN).

Citadel Bought the Whole Book at a Discount

By July 30 the forced seller had a buyer. Ken Griffin’s Citadel reached a deal to buy the fund’s public portfolio at a discount understood to be around 10% — after entering discussions on July 29 (CNBC). It’s a familiar pattern for the firm: stepping in to buy quality assets from leveraged players forced to unwind (TechCrunch).

The trade worked again. By August 21, Griffin’s letter to clients said Citadel had unwound more than 80% of the acquired risk through more than 100 block trades worth over $4 billion (CNBC). Its flagship Wellington fund finished July up 5.94% — the best month since 2022 (CNBC).

Griffin credited the banks for the speed of the handover: “A transaction of this magnitude could not have been completed without the extraordinary cooperation of the trading and prime brokerage teams at the banks serving both firms” (CNBC). Sit with that quote for a second — the same banks now fielding SEC subpoenas were the ones midwifing the fire sale.

The sale also marked the bottom. AI infrastructure stocks rebounded the day Citadel stepped in, and SK Hynix and CoreWeave have rallied since (CNBC, CNBC). Shares of several AI infrastructure companies jumped the moment the deal surfaced, instantly boosting the value of the positions Citadel had just acquired (CNBC). Bank of America CEO Brian Moynihan — whose bank was one of the fund’s prime brokers — said BofA would have been “fine” even without the rescue (CNBC).

The Contagion That Almost Was

One fund blowing up is an anecdote. What nearly happened around it is why regulators care. Jane Street — a Situational Awareness investor and one of the biggest names in market making — took a $15 billion hit in July, including losses tied directly to the meltdown, per FT and Reuters (FT, Reuters). It still generated more than $40 billion in net trading revenue over the past year (FT).

The Economist spelled out the tail risk: if Citadel hadn’t stepped in, the fund might have had to fire-sell tens of billions of dollars of assets — assets other firms held leveraged positions in. That could have triggered a cascade of margin calls, and potentially a credit or even bank crisis (The Economist). Columnists invoked Long Term Capital Management, the 1998 hedge fund collapse that nearly took the financial system with it (Economist via HN).

Michael Burry of The Big Short fame was less worried about the system and more about the trade: on the rebound day he added bearish positions in Micron, the VanEck Semiconductor ETF and Nvidia puts, calling the reversal “historic… even more so than what happened 26 years ago” (CNBC).

The next stress point, according to analyst Eric Newcomer, may be Nvidia’s vendor financing — arrangements that help customers pay for the chip giant’s own GPUs (Newcomer). When the collateral is the product, a margin call becomes a demand for hardware.

Why the SEC Went After the Banks First

The New York Times first reported the subpoenas on August 24 (NYT). Per Reuters, the SEC is seeking information on the fund’s trades, use of leverage and communications with the investment banks — Goldman, JPMorgan, Citigroup and Bank of America, the lenders that supervised its trading and channeled funding to it (CNBC, TechCrunch). The agency reportedly told the banks to “preserve any information” about the fund (TechCrunch).

Read the scope carefully. The SEC is not, publicly, investigating the AI thesis. It’s investigating the financing — who extended how much leverage, on what terms, with what visibility into a book that was levered four times into a crowded trade. The fund itself was already in the agency’s orbit: its holdings are on file via quarterly 13F reports (last10k). What the SEC wants now is the part that never made it onto the filings. The breadth of the request — trades, leverage, communications — suggests the agency is reconstructing how the fund was financed stage by stage, and what each lender knew about the leverage at every step.

None of this means wrongdoing. CNBC notes such inquiries routinely conclude without enforcement action (CNBC). The fund’s statement struck a cooperative tone: “It is to be expected that regulators would closely examine any funds that are high profile, produce significant returns, or have particularly dramatic drawdowns… We are a highly-regulated business and will cooperate to the fullest extent with any regulatory request” (CNBC).

The real question is what the SEC learns about the banks’ conduct — whether prime brokers competed so hard for the fund’s business that the usual guardrails loosened. Moynihan hinted at the reflex on August 5: “The tendency is to tighten the underwriting standards, just a hair” (CNBC).

What the First AI-Finance Blowup Actually Proves

First, it doesn’t prove the AI trade was a bubble. The same stocks the fund was forced to dump have since rallied — the crash was a positioning event, not a fundamentals event (CNBC). Whether the broader AI economy is a bubble is a separate argument, one we’ve made at length in our analysis of what survives when the AI bubble bursts.

What the blowup does prove: leverage has quietly become the AI trade’s connective tissue. The fund was the most visible example of borrowed money amplifying an AI thesis, and its near-collapse “cast light on the various ways in which leverage is increasingly underpinning the wider AI boom” (CNBC).

Moynihan was blunter the week after the collapse, calling the episode one of “these… warning shots”: “Valuations get out, leverage in the system gets there. You have to be careful” (CNBC). His comments suggested the largest prime brokers were already reexamining their exposure to highly leveraged investment firms (CNBC).

Second, the players are already moving on. The fund kept its private assets, including an Anthropic stake valued around $5 billion — Anthropic was last valued at $965 billion in May, with an IPO expected as soon as October (TechCrunch). Other private holdings include chipmaker MatX and AI data-center startup Fluidstack (TechCrunch). In early August the fund put $400 million into chip startup Source Foundry, bringing its total there to $500 million (TechCrunch). Bloomberg reports investors still clamor to back the “AI whiz kid” (Bloomberg).

Third, this is now the template. The SEC’s bank-first approach — subpoena the lenders, map the leverage, see who looked the other way — will likely be the playbook for the next AI-finance stress event. Given how much of the AI economy now runs on financed capacity, there will be a next one.

The Bottom Line

Situational Awareness wasn’t the first leveraged fund to blow up, and it won’t be the last. What made it different was the costume: the AI thesis was so compelling that hundreds of millions of dollars and four times leverage felt rational. The subpoenas are a reminder that when the trade is crowded and the money is borrowed, the thesis is never the whole story — the plumbing is.

The hype-fund that nearly collapsed is now an SEC investigation, and the first big AI-finance blowup wasn’t the AI’s fault — so what happens to the next fund that bets everything on AGI?

References

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