Leopold Aschenbrenner, the rising, leveraged hedge fund star over at Situational Awareness, ran into a bit of trouble last month. What was a fairly painful but routine correction within the AI scene turned catastrophic for the fund, which was forced to liquidate positions at the worst possible time. Indeed, it must have been rough being forced to sell out of positions at close to a bottom, right before a fierce recovery.
High beta, high leverage, and hyper growth investing can lead to hyper pain and major regrets.
That’s the danger of levering up by too much. With so much margin in the market, the big question is what could happen at scale once the stock market actually falls into a bear market, with high-flying tech leading the way lower.
Situational Awareness falls to the canvas
Any way you look at it, Situational Awareness is now a cautionary tale that many will probably remember for its meltdown rather than the meteoric rise that preceded it. Either way, this isn’t the last we’ve heard of Mr. Aschenbrenner, a man who seems more than willing to pick himself off the canvas.
Indeed, when you invest in the chokepoints of the AI revolution, you’re bound to get knocked down once or twice. And with Situational Awareness more recently betting $400 million on a relatively unknown semiconductor startup named Source Foundry, questions linger as to whether the recent wave of margin calls and forced selling at a discount to Citadel will be just a blip rather than the fading away of another star hedge fund that scored massive gains only to close up shop shortly after.
Time will tell if the latest big bet will kickstart Mr. Aschenbrenner’s comeback. There’s certainly a shortage of foundry demand, with Taiwan Semiconductor (NYSE:TSM | TSM Price Prediction) facing more demand than it can handle. But, at the end of the day, private foundries require a ton of capital, time, and, of course, there are execution risks. In the meantime, some former names held in the Situational Awareness fund, I think, look tempting now that they’re back on the ascent. Here are two worth looking at closely.
Maybe Aschenbrenner was right about the firms he was long, but wrong about the near-term timeline and how to go about managing risk.
CoreWeave
CoreWeave (NASDAQ:CRWV) shares exploded higher after suffering a painful 56% drop from peak to trough. That’s a painful enough crash to cause unfathomable pain in a levered fund. With shares ricocheting close to 50% off the lows, though, the neocloud firm seems to be ready to shrug off what would have otherwise been a routine correction for a firm that’s exploded higher in the year prior.
If the latest recovery bounce leads shares back to highs, it’s going to be painful for Mr. Aschenbrenner, who sold much of the holdings within Situational Awareness. Indeed, margin calls tend to hit at the worst possible time, days or even hours before a bottom is in and a rocket of a rebound unfolds. Not much about the CoreWeave story has changed. Though, the valuation remains difficult to get behind, especially for those who aren’t fans of the neocloud business model.
Nebius Group
Nebius Group (NASDAQ:NBIS) neocloud play that bounced suddenly after a near-50% haircut. The shares gained 52% before pulling back around 17%.
The shares of the AI factory play look like a great deal as the firm looks to take things into overdrive, even as Dr. Michael Burry enters the name with new shorts. Speaking of pain, Dr. Burry’s bearish bets have certainly not gone his way in recent weeks.
But, either way, it’s never fun to have a big short shorting shares you’re invested in. While GPU depreciation remains a key risk. Still, it’s not like older chips will be worthless once something newer and better comes out. In my view, older clusters of GPUs are “good enough” to keep fetching in considerable sums.
Any way you look at it, I do think that Nebius is not a name that one would want to bet on or against, given the kind of volatility that’s to be expected.
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