> Good for Mr Aschenbrenner for chancing his arm. The mystery is what on earth his investors were thinking. Perhaps they weren’t. In which case, that would be more worrying than anything about Situational Awareness’s humbling.

The Economist should change its name to The Populist with this type of screed.

Here's the reality:

1. Lots of money is invested willy-nilly for all sorts of reasons (or no reason at all) in all sorts of dubious and poorly-managed vehicles.

2. Except for the profile of the fund manager and that this was AI, this failure wasn't all that special. The seed capital for the fund is reported to have been around $225 million and it was highly leveraged on top of significant gains so there's a whole class of LPs who probably aren't even going to lose anything on this. It's the people who put capital in more recently who are going to lose.

3. The people who will lose money investing in this fund are the type of people who have a full wardrobe. It's going to be a very long time before they "lose their shirts".

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JumpCrisscross 20 hours ago | parent | next [-]

> this failure wasn't all that special

>> people who will lose money investing in this fund are the type of people who have a full wardrobe

If Citadel hadn't bailed him out, Situational Awareness very likely could have triggered a cascade of fire sales. That would not only hurt ordinary investors' positions, it could have also triggered a credit or even banking crisis (depending on how the margin loans are held).

A big, leveraged, concentrated fund blowing up isn't novel. But it's the traditional way to start a recession.

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ElProlactin 20 hours ago | parent [-]

> If Citadel hadn't bailed him out, Situational Awareness very likely could have triggered a cascade of fire sales.

Citadel didn't bail him out/rescue him. This was a distressed purchase, made at auction. Citadel believes it will eventually make money on the book, which was only around $16 billion.

If Citadel and Millennium (the other bidder) hadn't stepped in, the prime brokers would have liquidated the collateral themselves. The collateral here was mostly liquid mega-cap semi stocks. Probably the best and easiest collateral to deal with. And the exposure was split across three of the most highly capitalized banks (BofA, Goldman and JPMorgan) and they were already managing the wind-down when Citadel stepped in opportunistically.

If AI is going to take down the market, it isn't this. It's all the private credit exposure that isn't getting marked to market daily.

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JumpCrisscross 20 hours ago | parent [-]

> Citadel didn't bail him out/rescue him. This was a distressed purchase, made at auction. Citadel believes it will eventually make money on the book, which was only around $16 billion

...you're describing a bail-out. The LTCM lenders and Fed in the financial crisis made money on their books. They were still extending liquidity.

> the prime brokers would have liquidated the collateral themselves. The collateral here was mostly liquid mega-cap semi stocks

Yes. By fire selling. Which triggers, in turn, further margin calls and potential failures.

I'm not saying it's a certainty. But claiming there is limited financial risk from any $10+ billion leveraged meltdown is absurd.

> If AI is going to take down the market, it isn't this. It's all the private credit exposure that isn't getting marked to market daily

Private markets move slowly. That gives time to mop up messes. Crises metastasize when they hit public instruments precisely because that's where the most volume, leverage and potential for panic live.

	▲	ElProlactin 19 hours ago \| parent [-]
		> ...you're describing a bail-out. The LTCM lenders and Fed in the financial crisis made money on their books. They were still extending liquidity. Sorry, but this is just not accurate. LTCM was a coordinated recapitalization. The New York Fed brought together 14 institutions who put over $3.5 billion of their own capital into the fund in exchange for about 90% of the fund's equity, and then they wound the book down slowly over the following year. Here, Citadel, without any regulator involvement, made an arm's-length purchase of Situational Awareness' assets at a discount in a competitive auction. It put no money into the fund. Also, you need to look at what LTCM was versus what Situational Awareness is: LTCM was invested in fixed-income securities with highly-illiquid derivatives exceeding $1 trillion. Its leverage was 25x. Situational Awareness was a long/short equity fund with 4x leverage in daily-marked, over-collateralized margin accounts, held against liquid large-cap semis, with three well-capitalized prime brokers who saw the failure coming and were prepared to manage the collateral. > I'm not saying it's a certainty. But claiming there is limited financial risk from any $10+ billion leveraged meltdown is absurd. You're failing to make a distinction between this fund melting down and the correlated risk. Situational Awareness made leveraged bets in highly crowded trades. While forced selling into an already-falling market can be problematic, it's a second order effect. A symptom, not the cause. > Private markets move slowly. That gives time to mop up messes. Crises metastasize when they hit public instruments precisely because that's where the most volume, leverage and potential for panic live. That's not how it works. Slow marks to market don't give you time to mop up messes. They are what allow institutions to keep lending against untested valuations. And you have it backwards on volume. Volume isn't what makes crises metastasize. It's what lets them resolve. Bad public investments can be cleared in a block trade while private ones have no exit that doesn't set a mark for everyone still holding. This is why 2008 started in mortgage credit that was being carried at model prices. It didn't start in public equities. If you look at the history of deleveragings, the ones that stay contained are the public ones.

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mmoustafa 20 hours ago | parent | prev [-]

It is just the most visible “close call”. Most of the time we don’t hear about these incidents until they blow up, that is if we hear at all.

	▲	ElProlactin 20 hours ago \| parent [-]
		But there was no "close call". His fund was not systemically important. It was mostly public equity investments in some of the largest names in the market that were highly leveraged.