Heeding the lessons of Archegos Capital’s 2021 implosion – which inflicted $10 billion of losses on prime brokers and played a role in the downfall of Credit Suisse – banks moved swiftly to issue margin calls on the billions of dollars lent to Leopold Aschenbrenner’s Situational Awareness when the market moved against his concentrated portfolio of artificial-intelligence stocks.
J.P. Morgan, Goldman Sachs, Bank of America and Citigroup appear to have averted losses when San Francisco-based Situational Awareness – among the fastest-growing hedge funds in history – ran into trouble, a consequence of heavily leveraged long investments and short bets that soured simultaneously.
Unlike the Archegos episode, prime brokers were quick to demand additional collateral and reduce their exposures, multiple industry sources said. It helped greatly that Wall Street firms were willing to swoop in as opportunistic buyers.
Hedge fund giant Citadel ultimately acquired the bulk of Situational Awareness’ public equities portfolio, which allowed the prime brokers to facilitate an orderly transfer of the positions rather than dump them on the open market. A forced sale of that kind likely would have depressed prices further and could have ignited a contagion among the shares of companies underpinning AI infrastructure.
“They [prime brokers] all act much faster post-Archegos, and as they see big stakes building in volatile names, they proactively reach out to discuss,” the chief operating officer at a large event-driven fund said. “This was going on before the Situational Awareness blowup.”
The COO of a top-tier multi-strategy fund agreed, saying he spoke with an array of prime-brokerage operations as the Situational Awareness crisis unfolded. Some prime brokers, the COO said, told him they chose not to work with the firm given that it was so concentrated. The banks that did sign on, the executive said, “had Archegos in the back of their minds.”
Situational Awareness also was known to apply debt aggressively – about four-times leverage – to amplify its bets, adding to its risk profile.
While it’s possible new details indicating poor oversight among prime brokers will emerge in the weeks or months ahead, it appears Situational Awareness’ troubles demonstrate how much banks have strengthened their risk controls and coordination since Archegos’ collapse.
Prime brokers, in part, were prompted to improve their risk management by regulators who chastised the banking industry. The Federal Reserve wrote what it calls a supervision and regulation letter on Dec. 10, 2021, instructing banks to “receive adequate information with appropriate frequency to understand the risks of the investment fund.” That meant getting more detailed and frequent information about hedge fund clients’ leverage, concentrated positions and relationships with other prime brokers.
Post-mortems on Archegos pulled no punches, saying that some of the firm’s prime brokers, largely driven by the lucrative fees associated with margin lending, failed to provide necessary scrutiny.
Like Situational Awareness, Archegos made concentrated, leveraged bets, though the comparison ends there. Archegos, which targeted U.S. and China technology shares, was the family office of Tiger Asia founder Bill Hwang. In March 2021, his portfolio came undone when his continued, debt-fueled purchases drove stocks to unsustainable prices. When the share prices rapidly collapsed, the prime brokers moved to collect, unaware that he had misled them about the extent of his borrowing, in part because of his use of total return swaps.
Credit Suisse and Nomura bore the brunt of the flameout. The Swiss bank, which lost $5.5 billion, shuttered its prime-brokerage unit and, in March 2023, was absorbed by UBS. Nomura, which lost $2.9 billion, scrapped its margin-lending business. UBS took a hit of its own on Archegos, pegged at $861 million. Morgan Stanley lost a similar amount.
In 2024, Hwang was sentenced to 18 years in prison over allegations of fraud and market manipulation.
Since then, industry participants said, banks have tightened lending rules and have invested in risk-management and stress-testing technology. They’re also more vigilant about determining a firm’s total debt exposure.
For now, Situational Awareness remains intact. In addition to retaining some of its public equities book – the value couldn’t be determined – it holds a big private stake in Anthropic valued at $5 billion or more. And despite its struggles, the firm’s 2026 returns are still believed to be about 80%, well above most other hedge fund operators.
Situational Awareness’ current assets couldn’t be learned, though some reports have placed it at $8 billion to $10 billion, including its private-company investments. Hedge Fund Alert was among the first to report on Aschenbrenner’s firm in July 2024, when it had just $100 million of assets. HFA also was first to report in May of this year that it had reached $20 billion.
Aschenbrenner, a former OpenAI staffer in his mid-20s, last week wrote a mea culpa to investors, stating that his goal was never to end up in “such a position in the first place” and that he would no longer rely on leverage.
One veteran multi-strategy executive cautioned that such lessons are often learned the hard way.
“When you are juggling nitroglycerin, you shouldn’t be shocked when you blow up,” the executive said.
