A hedge fund is now being scrutinized for its massive overleveraged bets after it nearly collapsed.
Situational Awareness caused Citadel rival Jane Street a $15 billion dollar loss after bets went sideways.
Jane Street’s loss represented the hedge fund’s first monthly downturn in 10 years.
“The slump did expose a level of directional risk that goes well beyond the traditional Wall Street middleman and showed how the lines between market-maker, proprietary trader and hedge fund have been blurring among the new power players in finance,” said Bloomberg.
The New York Times reported that Situational Awareness borrowed from banks nearly $3.7 trillion dollars — a figure the Treasury Department says is the largest in over a decade and roughly three times the level recorded when the pandemic began in 2020.
Who were these lenders?
Major banking giants such as Bank of America, Goldman Sachs, and other Wall Street banks.
The firm’s executives pressed multiple lenders to raise their leverage ratio all the way to ten times the fund’s investor capital, up from four times, The New York Times reported, citing a banker familiar with the negotiations.
US Banks Receive Subpoenas Following a Massive Margin Call
Four banks received subpoenas by the Securities and Exchange Commission (SEC), including Bank of America, Citi, Goldman Sachs, and JPMorgan Chase.
Tbanks are being investigated for how it handled trades and its communications with lenders about borrowed money, and the amount of leverage used.
Jane Street’s investment in Situational Awareness, the AI hedge fund started by Leopold Aschenbrenner, was one of those longer-term bets.
The hedge fund took a plunge in July as AI shares fell, forcing the young founder to offload most of its public equities book to meet margin calls.
Bloomberg reports that Jane Street’s bets in Asian equity markets were also challenging.
“We’ve closed a significant portion of our risk in the specific areas we lost on in July, and have also reduced risk-taking in other strategies,” Turner Batty, a Jane Street partner, said in an internal note.
“Our positions currently seem appropriate for our present risk tolerance.”
Citadel’s Ken Griffin also said they were unwinding significant exposure in a letter to clients.
And while a Citadel spokesperson declined to confirm or deny if they were part of the SEC subpoenas, Griffin stated only Citadel could have delivered a “solution” to this mess.
“Only Citadel could have delivered a solution of this scale on this timeline,” Griffin wrote in the letter, as reported by the New York Post.
Clients were notified that Citadel had already unwound more than 80% of the aggregate risk from the Situational Awareness portfolio it purchased, executing more than 100 block trades worth over $4 billion in three weeks.
Situational Awareness has been cooperative stating that it is not surprised high-profile players are being investigated.
“It is to be expected that regulators would closely examine any funds that are high profile, produce significant returns or have particularly dramatic drawdowns,” a fund spokesman said in a statement to the Times.
“We are a highly regulated business and will cooperate to the fullest extent with any regulatory request.”
Frank Nez is an American entrepreneur, journalist, writer, and investor. Frank's work has been cited by SEC and Congressional reports. Franknez.com is a personal finance and market news publication, dedicated to publishing content on money, investing, entrepreneurship, and retail investor news.
