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24-year-old's $45 billion fund unravels
A fund at $45 billion
Aschenbrenner is 24. His fund, Situational Awareness, was up 439% for the first half of the year, swelling to roughly $45 billion. He told investors the sell-off had created an unusually attractive opportunity.
The margin call
Six days later, after mounting losses and margin calls, the sale to Citadel went through. The fund had been levered up 5x, and the margin call forced it to liquidate most of its public stock portfolio. The positions sat in the hottest momentum stocks in the world.
The reputation
Aschenbrenner is also reported to be selling his stake in Anthropic. On Twitter and across the investing community, he had been considered AI Jesus, a savant who could predict the future.
How does a margin call force a sale?
When an investor borrows from a broker to buy stocks, the shares themselves serve as collateral for the loan. If prices fall far enough that the collateral no longer covers the loan by the required margin, the broker demands more cash or securities. When the investor cannot deliver, the loan agreement lets the broker sell the holdings without asking. In the United States, the Federal Reserve's Regulation T sets the initial margin requirement for stock purchases at 50%, and FINRA rules set a maintenance minimum of 25% equity.
Why does 5x leverage make drops so dangerous?
A fund levered 5x holds five dollars of stocks for every dollar of its own capital. A 20% fall in those stocks therefore wipes out all of the fund's capital. The hedge fund Long-Term Capital Management ran far higher leverage than that in 1998 and lost most of its equity within months after Russia defaulted on its debt. The Federal Reserve Bank of New York then organized a $3.6 billion rescue by 14 banks.
Why do funds pile into the same momentum stocks?
Finance researchers Narasimhan Jegadeesh and Sheridan Titman reported in 1993 that US stocks that had risen over the previous three to twelve months tended to keep outperforming over the following months. Funds that follow that pattern end up owning many of the same names. When one of them must sell, prices drop and every other holder of those stocks takes a loss too. In August 2007, quantitative equity funds suffered sudden, simultaneous losses over several days as they unwound similar positions.
Why sell a whole portfolio to one buyer?
Dumping a huge position onto an exchange pushes the price down with each sale, so the seller gets less for the last shares than for the first. A negotiated block or portfolio trade lets one dealer take the entire position at an agreed price. The dealer takes on the risk of reselling it and is paid for that risk through a discount. Such trades are commonly negotiated privately and reported to the market afterward.
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