After the margin call, capital instead flocked to the "AI stock god."

Author: Wall Street Watch

Leopold Aschenbrenner's hedge fund "Situational Awareness" faced a collapse, but this crisis not only did not deter investors, but instead sparked a new wave of enthusiasm in Silicon Valley.

According to a report by Bloomberg on August 8, insiders revealed that just days after the fund's collapse, a large number of Silicon Valley investors proactively contacted Situational Awareness to express their willingness to invest more. Sequoia Capital partner Pat Grady publicly stated that he will remain an important figure in Silicon Valley for the long term.

A previous article by Wall Street Watch noted that Aschenbrenner himself admitted mistakes in a letter to investors, announced the elimination of all leverage, and characterized this crisis as "an expensive but invaluable lesson." Previously, in response to a margin call from lenders, Situational Awareness urgently sold most of its stock holdings to Citadel, owned by Ken Griffin, at a discount of over 10%. The fund currently has a remaining asset portfolio (including private equity investments) valued at approximately $10 billion. Despite suffering a heavy blow, the fund still recorded about 80% positive returns this year.

This incident has exposed the deep-seated differences between Silicon Valley and Wall Street. Wall Street views this as a classic case of an AI hotshot paying the price for excessive leverage; whereas Silicon Valley's reaction is entirely opposite—many investors see it as an opportunity to "buy the dip," continuing to support this former OpenAI researcher turned investor. Currently, Situational Awareness has informed investors that it will not accept new funds for the time being, but the enthusiasm from the outside has not waned.

Silicon Valley Support: Hero Narrative Over Risk Warnings

The experience of the fund's collapse has not become a stain in Silicon Valley; rather, it has reinforced Aschenbrenner's "hero persona."

Logan Bartlett, Managing Director at venture capital firm Redpoint Ventures, candidly stated: "There is a hero archetype here. Leopold took a punch, and it instead sparked unity among everyone." Veteran venture capitalist Elad Gil even publicly announced the first application to invest in Aschenbrenner's fund.

Sequoia Capital partner Pat Grady, when asked about the turmoil of Situational Awareness during an interview on Bloomberg TV on Thursday, said:

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

Gygmy Gonnot, a part-time professor at NYU Stern School of Business and Managing Director at Focus Investment Group, provided a structural explanation for this divergence:

"Silicon Valley rewards those who make correct judgments in transformative technology directions, while Wall Street rewards those who create substantial risk-adjusted returns while preserving principal."

Wall Street Skepticism: The Old Problems of Leverage and Concentration

For Wall Street, the near collapse of Situational Awareness is not surprising; it is a recurring old story in the hedge fund industry.

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

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

"To be clear, this is a super concentrated position, a super crowded position, and also a super high leverage position."

From the beginning, some institutions on Wall Street held a cautious attitude towards Aschenbrenner's fund. Unlike similar funds, the investors in Situational Awareness are primarily wealthy individuals and family offices from the San Francisco Bay Area, rather than the pension funds and sovereign wealth funds that typically invest in mature funds.

According to previous reports by Bloomberg, Barclays' prime brokerage division refused to onboard Situational Awareness as a client weeks before the fund's collapse, citing excessive concentration in a single industry as the reason.

Reports indicate that, according to insiders, Morgan Stanley also initially declined to provide prime brokerage services to Aschenbrenner, citing his lack of experience. However, these insiders stated that Morgan Stanley has since changed its position and plans to onboard the fund as a prime brokerage client in the coming weeks.

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

AI Sector: A High-Risk, High-Return Game

The AI-focused hedge fund sector where Situational Awareness operates is inherently a field of high volatility and high returns.

The team at competitor Value Aligned Research Advisors includes many veterans from BlackRock and Hudson River Trading, managing over $26 billion in assets as of the end of June. According to an investor document seen by Bloomberg, the AI fund under this company recorded a return of approximately 194% for the year up to June, far exceeding the nearly 10% increase of the S&P 500 during the same period.

Last month's sell-off of AI stocks had a wide-ranging impact, and even the largest hedge funds were not spared. According to Bloomberg, multi-strategy giant Millennium Management fell 2.1% in July, Point72 Asset Management dropped 3.3%, and the relatively concentrated Altimeter Capital Management hedge fund plummeted 11% last month.

Notably, some funds with similar holdings to Situational Awareness had already sensed the risks. Reports indicate that one fund established hedging positions in advance due to concerns that Aschenbrenner's fund would be forced to sell.

After Deleveraging: The Road to Reconstruction Still Requires Wall Street

After the crisis, Aschenbrenner's core challenge is how to find a balance between two entirely different worlds.

In his letter to investors, he stated that he has eliminated all leverage from the fund and is no longer using bank prime brokerage services to amplify bets—at least for now. He wrote:

"These are costly scars, but I am committed to ensuring they will become invaluable lessons for our institution and myself on the path forward."

However, to replicate the high returns of earlier this year, Aschenbrenner ultimately still needs to persuade Wall Street to provide leverage again. This means he must find a sustainable path between the enthusiastic support from Silicon Valley and Wall Street's strict requirements for risk management.