The whiplash decline of leading AI infrastructure hedge fund Situational Awareness took investors by surprise in July. Today, founder Leopold Aschenbrenner published a letter to investors with his take on the situation, conceding that “we let you down this month. We came closer to permanent capital impairment than is acceptable to us.”
Within the space of just a few weeks, the firm flipped from one of the best-performing funds of its kind to one scrambling to thin its balance sheet. The forced deleveraging was prompted by a disastrous month for semiconductor stocks as the Nasdaq 100 slipped into a correction, dragging the fund’s net performance down to -67% for the month.
The Latent reported yesterday that Situational Awareness had approached investors and lenders for fresh capital, with a promise to open up fresh deposits on August 1. Citadel later stepped in to acquire the vast majority of the fund’s public book in a single block sale.
As a result, Situational Awareness’ AUM dropped to a reported $10 billion, from an earlier peak of $45 billion. However, Aschenbrenner notes in his letter that the fund remained up 80% for the year (on an unaudited basis), with the recent hardships slashing but not eliminating its strong 2026 performance.
One dollar invested in the fund at the very beginning of this year would now still be worth $1.80 - far short of the $5.39 peak.
Leopold Aschenbrenner’s latest letter to investors
The latest release from Situational Awareness’ founder - who created the firm in 2024 after parting ways with OpenAI following a dispute over data protection - goes into detail on the exact mechanisms of the fund’s near-collapse.
The firm relied on a heavily leveraged trading model. Aschenbrenner asserts that negative price action and thinning liquidity among its largest stock positions, which were heavily concentrated in AI infrastructure and hardware, made it increasingly difficult to keep the fund operating within its risk parameters. While Aschenbrenner’s account emphasizes these factors, outside reporting nonetheless indicated that collateral demands from the fund’s lenders ultimately contributed to the forced deleveraging.
One interesting factor is that the fund also held short positions in non-AI SaaS companies such as Adobe, on the assumption that AI firms would erode the profitability of the incumbents. However, many of these companies actually posted unexpectedly positive earnings; Adobe itself posted record revenue with a 13% YoY increase, and its stock closed up 18.7% in July. The result was pressure on the fund from both ends, as both its long and its short positions came under pressure.
Notably, Aschenbrenner does not go into detail on the terms of the Citadel deal - in fact, that firm is not mentioned anywhere in the letter. He also includes no details on the fund’s remaining composition, which consists mostly of private positions and remains somewhat opaque. Analysts estimate that the firm’s stake in AI firm Anthropic amounts to around $5 billion, or roughly half of the assets believed to still be on its balance sheet.
Although Aschenbrenner’s letter doesn’t add much that is not already known, one key assertion stands out: he maintains that the fund is not in fact being converted into an entirely private vehicle, as the Financial Times previously reported. He says Situational Awareness will continue as a hybrid public-private fund, in which Achenbrenner claims almost all of his own personal capital is still invested.