The celebrated crystal ball of the “Nostradamus of AI” hasn’t merely gone cloudy — it has rolled off the table and shattered on the parlor floor.
Wall Street breathed a huge sigh of relief last week as an AI-focused hedge fund called Situational Awareness reportedly sold most of its portfolio — reportedly down 67% last month on the backfiring of debt-fueled bets on chipmakers and assorted artificial-intelligence firms — to billionaire Ken Griffin’s Citadel.
While the rescue quelled fears of a forced liquidation of the $20 billion fund that could tank the markets, it nevertheless left trading desks across town asking the same question: Is this the canary in the coal mine?
Are we finally seeing the start of the dot-com bubble of AI?
The prevailing sentiment was best summed up by a veteran Wall Street sage who has seen a lot of flameouts in his day.
Let’s just say he wasn’t impressed by Leopold Aschenbrenner, the 25-year-old German-born “Nostradamus” figure who is the founder of Situational Awareness.
(Great name for an organization in dire need of a wake-up call, by the way.)
“Just your typical leveraged idiot who was right until he was wrong,” the source said, adding that the implosion is a “one-off.”
Another source waxed slightly more poetic: “Ah, yes — a 25-year-old kid who’s a billionaire on paper because of a bubble. Everybody thinks they can raise a fund but they forget about how hard it is to be a good fiduciary.”
Still, a third trusted source felt there was room for conversation: “A significant issue. Not viewed as systemic right now. I wonder if that changes as more problems arise.”
Indeed, the fact is that most of Wall Street is closely monitoring the Situational Awareness situation because they were holding many of the same positions as Aschenbrenner.
Another top hedge fund manager I won’t name tells me he has been getting crushed on similar investments in chipmakers essential to the AI supply chain, as well as other companies feeding off this technology.
Irrational exuberance
Many of them, like the erstwhile wunderkind, had been killing it for the past year, powered by exuberance — or maybe irrational exuberance — that AI is not just game-changing technology for mankind, but also something that will throw off tons of profits.
But unlike Aschenbrenner, my source isn’t a novice investor who attracted a cult following that included a few big players with his AI pixie dust.
Aschenbrenner graduated from Columbia at age 19, so he must be smart, the thinking goes.
He worked at OpenAI, so surely he is a visionary like Sam Altman.
He wrote a viral treatise that predicted AI’s dominance across business and culture, so he must be the next Satoshi Nakamoto, right?
Well, if you also noticed, there’s not much investment experience on this résumé.
Unlike my guy who took some losses in the AI selloff, Aschenbrenner hasn’t been through enough market swings to survive this one easily.
Maybe more to the point, unlike Mr. Situational Awareness, my source isn’t 400% leveraged.
Surviving market upheavals like the granddaddy of them all in 2008 will teach you that, or in his words, “Sam Altman is a smart guy, but you wouldn’t want him managing a portfolio.”
Griffin, of course, is one of the world’s great investors.
He doesn’t take risks out of the goodness of his heart.
He must see some value in what Aschenbrenner stitched together.
After buying it at depressed prices that markets often create when they’re in panic mode, he’s going to make some money when things level out.
And yet, I’ve seen this act before, a rumbling before the dot-com crash of 2000 that the excitement over something new and possibly transformational means every company in its ecosystem will change the world and make boatloads of money.
In fact, just a few did.
Ditto for the 2008 financial crisis.
The heart of that problem was securitization.
Banks can keep selling mortgages and various loans to anyone even without a job because you eliminate risk by mixing the good loans with the bad ones.
But who’s to say what’s a good or bad loan when everyone “thinks” housing prices will keep rising — until, of course, they didn’t.
In the bowels of the AI ecosystem I’m hearing similar stories.
One big investor at a major pension fund tells me that the “amortized” cash returns with any near-term visibility on most AI companies he’s seeing are negligible.
He loves using AI tools, but many of them are free or priced cheap to gain a following.
They can’t stay that way forever if they’re going to pay for an infrastructure build that demands hundreds of billions in borrowing.
Capital is becoming increasingly scarce for anyone but the largest players, meaning VC shops in this space will face difficulties getting funding and withstanding margin calls on businesses that need more time.
A shakeout is coming, my source told me.
Situational Awareness is the coal mine’s canary.
