Global equities gained 0.5% in July despite a sell-off in AI related stocks that saw the Nasdaq fall -3.2%.
Emerging Markets (down -3.0%) were similarly affected with the Korean Kospi Index falling -22%, despite an 18% gain on the last day of the month.
The weakness in semiconductor stocks brought back memories of the January 2025 crash that followed the release of Chinese AI model DeepSeek, however this time the culprit was Kimi K3 which is said to have leapt to No.3 on the AI leaderboard behind Anthropic’s Claude Fable 5 and OpenAI’s GPT-5.6 Sol.
A meteoric rise
The main talking point for the month in financial circles was the “blow-up” of the (formerly) up to $45 billion hedge fund Situational Awareness, run by Leopold Aschenbrenner, former child prodigy and still only 24 years old. Born in Germany, Aschenbrenner has crammed a remarkable amount into a few short years including valedictorian of Columbia University at 19, helping run the philanthropic arm of bankrupted crypto exchange FTX and getting fired from OpenAI, either for leaking information or raising security concerns depending on whose side you sit on.
In 2024 Aschenbrenner released a widely circulated 165-page essay named “Situational Awareness” which helped launch his investment firm of the same name backed by a who’s who of Silicon Valley investors. In a series of leveraged bets on AI stocks as well as private investments in some of the leading AI labs, Situational Awareness is said to have booked gains of more than 1,000% by the end of June. By the end of July, it had all come tumbling down.
When the tide turns
According to most accounts Situational Awareness was caught in the general downdraft that hit AI stocks in July. Rather than trying to liquidate the portfolio to meet margin calls, which would have put further downward pressure on prices, Aschenbrenner chose to offload his entire listed equity book to Ken Griffen’s Citadel, effectively wiping out his investment.
Ironically, the very fact that Citadel stepped in to take over the Situational Awareness positions reassured the market that the forced selling was over, sending the very same AI stocks sharply higher.
No doubt this will be a great trade for Citadel, who made $1.4 billion the next day on the top seven stocks alone, but it will be a bruising experience for Aschenbrenner’s investors. Early investors are reportedly still up 80% for the year, due in large part to a multibillion-dollar stake in Anthropic, however recent investors will almost certainly see their investments wiped out.
Leverage magnifies everything
That someone as smart as Aschenbrenner could blow-up shouldn’t come as a surprise to anyone when you consider his portfolio was leveraged up to 400%. In fact, most risk managers would say it was nothing less than a certainty, given the degree of leverage and the volatility of the underlying investments.
With the number of 2x and 3x leveraged products growing by the day including single stock ETFs, this has predictably led to a wave of “blow-ups’. Only last month several ETFs, offering 3x the stock price move of Korean chip maker SK Hynix, fell more than 95%.
Even $SOX, the Philadelphia Semiconductor ETF, has a 3x levered version known by its ticker $SOXL. $SOXL peaked at over $300 per share in June, and at the time was up more than 600% for the year. However, in July it fell 57%, albeit it is still up more than 170% for the year. Which begs the question – why invest in Situational Awareness when you can just buy $SOXL?
The appetite for risk remains
Amazingly, it seems that animal spirits are alive and well despite the events of the last month, as $SOXL attracted a record $6.9 billion of fresh money in July.
We can only hope that Aschenbrenner takes these lessons on board and comes out the other side better for it. As legendary gas trader John Arnold likes to say, “My philosophy when I used to hire traders was that the optimal number of past blow ups was one”. You just want to make sure the mistake is with other people’s money.
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