Beyond the Noise: Markets, Investing, and the Bigger Picture
Conversations between Josh Renfro and Max Clark of the Fox Alliance that cut through the financial headlines to focus on the market trends, economic shifts, and investment themes that truly matter.
Beyond the Noise: Markets, Investing, and the Bigger Picture
Leopold: $45 Billion, 30 Days, and the 67% Collapse
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In this episode, we examine Leopold Aschenbrenner’s remarkable background, the investment thesis behind his enormous AI bet, and the combination of leverage, concentration, market volatility, and financing costs that turned conviction into catastrophe.
More importantly, we explore the lessons investors can take from the collapse: why a compelling long-term thesis does not guarantee a successful investment, how leverage changes the margin for error, and why risk management matters most when conviction is highest.
How does a 24-year-old come to run a $45 billion hedge fund? How does it fall apart in one month? And what can we as investors learn from this tragic story? In 2026, this year, just through the end of June, he was up 439%. That is shocking. Four times return in six months, essentially. And if you looked all the way back to since the fund started, they were up over 1,500%. Woo! That is amazing. That's no wonder he was getting such a big follow-up.
SPEAKER_00But when you use large amounts of leverage like Leopold was using with the hedgefront here, you are playing with fire.
SPEAKER_02This is how things can implode quickly.
SPEAKER_00And if you think about this in the context of like a retiree, you're gonna have 20 to 40% losses. It's high octane jet fuel on the ride up, but it's an explosive bomb going off that devastates everything in its sight as a portfolio starts to drop in value meaningfully.
SPEAKER_02It's a added risk. Yes. There's no free lunch. It's a two-edged sword. Yeah.
SPEAKER_00It cuts both ways. It can both work to your benefit, but it can also work against you.
SPEAKER_02Welcome
Meet Leopold Aschenbrenner
SPEAKER_02back to the Beyond the Noise podcast. My name is Max Clark. I'm joined by my co-host, Josh Renfro. You've probably seen a picture of this guy going around. His name's Leopold Ashenbrenner, a 24-year-old who runs a $45 billion hedge fund called Situational Awareness. Unfortunately for him, he made the headlines recently because his hedge fund fell 67% in one month. How does a 24-year-old come to run a $45 billion hedge fund? How does it fall apart in one month? And what can we as investors learn from this tragic story? Josh, let's start out by talking a little about his background. You know, Leopold really has a impressive resume.
SPEAKER_00Not a typical 24-year-old.
SPEAKER_02No, he does not. So he was born in Germany, uh, born to two physician parents, and I think one of the most impressive things about his background is he started at Columbia University studying economics, mathematics, statistics at the ripe old age of 15. Yeah, freshman in high school. That's amazing. So he he started at 15, graduated at 19, and he was the valedictorian, which obviously is a pretty impressive honor. Graduated in 2021, and that very next year joined a somewhat now infamous company called FTX. Now he didn't actually join the company itself, he joined more of their philanthropic philanthropic arm called the FTX Future Fund. And he, along with several other people, were responsible for making grants, if I recall correctly.
From FTX to OpenAI
SPEAKER_00That's right. And just for some context, FTX, for those who don't know, was a company that was heavily involved in the cryptocurrency world. I think they at one point had the third largest exchange anywhere. Um and so Sam Bankman Freed, or as we like to call him, Sam Bankman Fraud, ultimately got caught up in a fraudulent scandal. He did not run a tight ship. He was stealing clients' money, wasn't he? He was using clients' money without permission. Um and so ultimately, as you look through things, it appears that most of the money, I think all the money actually ended up getting returned, but it was a fraudulent activity, and so he ultimately has gone to prison. Um, and so it's important to note, and so they are they had their own um cryptocurrency and uh, or I'm sorry, not cryptocurrency, but they had their own NFTs, non-fungible tokens. And so um, but it's important to note here that Leopold was not involved at all on the He wasn't aware of anything that was going on there. Well, we don't know that necessarily, but we know he at least wasn't involved in the investment decisions, and he was specifically involved in the philanthropic charitable side of the organization.
SPEAKER_02Right. And I think it's important to note as well that when all of that came out, he, along with his colleagues of that fund, all resigned and moved on. They did. And he actually landed on his feet pretty well. Yeah, uh, he joined OpenAI back in 2022. Guys seems to always be where the action's at. He he does. Now, his stint there lasted about a year or so, and open AI actually ended up firing him. And as many people would probably expect, there is a bit of debate about why that occurred. OpenAI says that he was fired because he released non-public information and kind of was a leak or a breach in their security. Uh Leopold's perspective is something of the opposite. He didn't think that what he was doing was wrong and there was just a misunderstanding on that front.
SPEAKER_00Yeah, he was part of their super alignment team, which effectively part of their the goal was to make sure from a security perspective that um AI, the the efforts of open AI were not taking unnecessary security risks. And so his side of the story is he consulted several people outside the company to get their thoughts, um, which he said is standard industry practice. Of course, OpenAI says it's not. Um, and then he actually ended up writing a memo directly to the board about his security concerns. So that was those were the you know, there's two sides to the story. Who knows exactly what's right? But the interesting thing is right after he's fired, two other very prominent members of the super alignment team ultimately resign and leave. So that tends to give some additional credibility that he probably was in the right on that side. Right.
SPEAKER_02Yeah, so they resigned basically in solidarity with him, uh essentially believing that they were uh, you know, that he was fired potentially uh inappropriately in their ear.
SPEAKER_00And they ultimately agreed with his concern. And so shortly thereafter, the super alignment team was entirely shut down
The AI Thesis That Started It All
SPEAKER_00at that point.
SPEAKER_02Yeah, and so then Leo Leopold ended up kind of spending a lot of time writing, right? He came out with an essay.
SPEAKER_00Yeah, he did. He wrote, but it was this wasn't a typical essay. He wrote a 50,000-word, 160-page essay. This was a book, basically. Yes, and it's basically his views. The the title was Situational Awareness in I think the next decade. And he is trying to think extrapolationally about what he believes the next 10 years is going to look like because of AI. And he focuses on predominantly five major ideas. The first is that we will likely achieve artificial general intelligence, also called AGI, um, over the course of the next 10 years. He looks at his time at OpenAI and the print the massive um improvement that open AI is able to make in the artificial intelligence during his period.
SPEAKER_02Exponential growth.
SPEAKER_00Bingo. Yeah. And so he's like, I believe we will see another exponential move if it's not at AGI, very close to AGI.
SPEAKER_02And I think he was predicting that by 2027, if I recall correctly.
SPEAKER_00That's right. And so then that leads kind of to his second point, which he believes because of that, there will be an intelligence explosion, which he doesn't mean that there'll be a bunch of smart people. What he means is that P there will be a massive demand for using artificial intelligence uh to help increase the productivity of a large portion of these organizations.
SPEAKER_02Makes sense.
SPEAKER_00The third thing that he ultimately focused on was the actual need for a large-scale build-out. He was making this prediction back in 2024 that there would be massive demand for additional data centers and all of the infrastructure necessary in order to actually make those data centers possible. So every facet of the semiconductor process, things like memory, lithography, the power that's necessary to do it, the actual power and cooling systems inside these data centers, every facet of the data center process was going to have an exponential demand. And he actually said he expected we would need at least a trillion dollars, if not more, of build out that would take place. And take into account this is back in 2024. This is not a commonly held view at that particular point in time. It's early on. It is in the arrival of AI. We are. We're very early at that point. And so the fourth major thing he touches on is he believes that AI will become a large-scale, massive national security um discussion and strategic priority, to the point that he believed that the U.S. government, along with other governments around the world, would see AI models and their weightings and everything that goes into building a good AI model as a strategic national security resource at that time.
SPEAKER_02You know, it's interesting because I feel like a little that that is a little prescient. I mean, we've seen that interaction or that debate between China and the United States and other international geopolitical players become a reality today. We'll have to see how that ultimately plays out. But you know, then the last thing that he uh brings up in that essay is that this is going to be a very capital intensive time period and something that investors can really benefit from. So as he released this uh essay, he did that or it coincided with the start of his hedge fund, which he called the Situational Awareness Limited Partnership. And his goal there was to invest in these opportunities that he was seeing. You know, if this essay was really going to play out as he expected, then there was a lot of opportunity to invest and and make some meaningful returns.
Building a $45 Billion Hedge Fund
SPEAKER_02That's right. And so the fund started back in 2024. They began with about 225 million, and they kind of described the overall strategy themselves as a global long short portfolio, uh, specifically in that kind of macro AI space, which means they're gonna look to own the winners, the companies that they believe are gonna succeed, but also bet against the companies that they believe are going to be negatively impacted by this playoff. And I think it's also important to note that he he didn't just own AI explicit stocks. You know, he's looking also for companies that are going to benefit from the build-out of AI and and other things connected to AI and also those areas that are going to be kind of what he described as AI bottlenecks. You know, areas where like energy, for example, where you're going to see a very large increase in demand for that resource and not be able to Yeah, there's structural problems with being able to supply the amount that's needed.
SPEAKER_00And that typically results in prices going up a lot and it becoming a pretty profitable area.
SPEAKER_02Increasing demand and not enough supply, effectively. So he was doing all of this, but the long short fund structure meant that he wasn't just owning stocks in kind of your traditional uh method. He was also using hedging to provide some downside protection, but also using stock options and shorting of stocks to try to amplify returns.
SPEAKER_00Yeah, he was trying to make money by when uh when investments that they thought would lose because AI was disrupting them ultimately went down in value. He was betting against the companies that he thought would be disrupted by AI. That's right. Additionally, and I think another important piece of this is this was a hybrid portfolio, meaning it was not just public stocks or even shorting public stocks, it also had a private market component. He it had two notable positions in the portfolio. The first and the biggest one was Anthropic. Yes, back in early 2025 during their $60 billion raise. Um, he Leopold was a key investor in that round. Um, and that investment did really well. You know, we've had a past episode where we talked about the explosive growth of anthropic. They got in during that really explosive um, you know, last year and a half, you know, at the $60 billion round, as a reminder, Anthropic today is marked up to a roughly a $965 billion value. And so it's been reported that at least at one point, um, situational awareness's anthropic position was over $5 billion in size. So they did very, very well on that particular investment. The other one that they made an investment in was a company called MatX, which is a uh AI semiconductor company as well. And so there was a $500 million funding round that they, along with Jane Street, were principal investors in. And so once again, this portfolio is not just invested in stocks, it's also invested in some private market investments as well, which that's a key part of the story and becomes actually one of the challenges. Um, it's it's a positive thing on the performance side, but it becomes a challenge as we approach July of this year when the fund ultimately has its problems. I think the other thing that's important to think about here is what were the areas that we saw the stock portfolio actually based in? And so there were several key areas. So we had really four major areas that they invested in. The first was power generation and on-site power. So, once again, this is the idea of being able to actually power these data centers. And many of these data centers couldn't get off the ground unless you actually had the ability to generate power on-site and have reliability. So, stocks that they invested in included ones like Constellation Energy, Vistra Talon, Bloom Energy, Solaris Energy Infrastructure, EQT, Babcock, and Wilcox. The second major area was data centers, the Neo Clouds, uh, and former crypto miners that were trying to convert to ultimately providing data center power. The group good examples here would be companies like Core Weave, Core Scientific, amongst others.
SPEAKER_02Yeah, so that's an interesting point there. He was looking to invest in companies that used to have a different purpose. You know, they were repurposing their uh resources to now begin kind of either energy generation or data center um provision to these AI companies.
SPEAKER_00Yeah, exactly. Because at the end of the day, those were stocks that were valued for one thing, but they had the potential to become as valuable as AI companies instead. So that leads to the third area, which were semiconductors, the memory, the storage, the networking, the cooling. And these is where this is where we come across a lot of names that people are a lot more familiar with Marvell, Broadcom, Intel, Micron, Sandisk, Vertiv, amongst others. Um, and then lastly, we have the area in the private markets with Anthropic and Mad X is kind of the final, I guess, leg of that stool when it comes to the portfolio.
The Cult Following Behind the Fund
SPEAKER_02And as his performance started to become more well known, um, and obviously he's he's positioned himself as kind of this real leader in the AI frontier world and kind of this forward thinker, obviously a brilliant guy, he started to develop a bit of a a following, almost a cult-like following. He did. Where when they would release their quarterly uh updates or their letters, and when he would talk about the positions that he was taking, you would actually see kind of this reinforcement cycle, right? Where he would release the fact that he bought positions and then the public markets would go and buy that position too because they felt that if he had conviction in it, it was something that we should have conviction in as well.
SPEAKER_00And there were some good reasons for that. So first half of 2025, uh Fortune magazine reported that they were up like 47%.
SPEAKER_02In just the first half.
SPEAKER_00Just the first half of 2025. So that's the first thing. Second thing, um, Leopold is uh is now engaged. In fact, he's getting married to the chief of staff for Dario, the CEO of Anthropic. When he launched the Situational Awareness Hedge Fund, you know, he launched it around several key ideas. One was investing in these investment themes that had magnitudes of order effects where these things could exponentially grow. But one of the other key things, and this is honestly also brought around some accusations of conflicts of interest, has been his close personal set of network within the Silicon Valley community. And so that was the other side of it. So the groups that followed him rather religiously, one, they saw his performance and how he did, but then two, they also recognized this guy is really well connected to the main leaders that are really propelling the AI movement. So he has an inside scoop that a lot of people don't have.
SPEAKER_02And to be clear, there's been no actual confirmed uh insider trading or anything like that. Sure. But there was this reality that, hey, this guy knows a lot of people that we don't know.
SPEAKER_00And he's got an inform at the very minimum, you can have an information edge. You know, it's not illegal to talk to people at private companies and know what's going on with those with those individuals. The same rules that apply to to buying and selling publicly traded stocks don't apply to private companies.
SPEAKER_02So an uh an example of how that cult-like following really impacted the public markets was with a company called Nebius. And what was interesting about that was when he when it came out that he had purchased that company in his fund, within hours of that release, the stock had risen 5.6%. So he really became uh or really started to have a meaningful impact on some of these individual AI stocks and AI adjacent stocks and in the public market.
SPEAKER_00And it didn't just transpire with the buys, it was also on the shorts because also uh if certain trades are above certain size, they're they're all reported. And so if you know ultimately a short position was announced or any public statement was made, guess what? Many of the stocks that they said they were gonna short also had additional selling activity that took place. So that's the thing is when you become popular like that, anytime you announce that you were going to buy something, everybody's like, well, man, I gotta get on it too, which means more people buy it, which causes what? The price to move up. And this flip side is also true. When you announce, hey, I'm shorting something or I don't like this company, I think it's gonna be disrupted by AI. What happens? Other people, if they own it, like, man, well, I gotta get out of that. Or on the flip side, you actually have more people trying to short those same positions, which further causes the price of those stocks to come down. So, in to some extent, it becomes a bit of a fulfilling prophecy.
Up 439%: The Rise of Situational Awareness
SPEAKER_02Yeah, a self-fulfilling prophecy. Exactly. Yeah. So he had really great performance. Let's put some numbers to what that actually looked like. Um, in 2026, this year, just through the end of June, he was up 439%. That is shocking. Four times return, four X return in six months, essentially. And if you looked all the way back to the first investors that put their money in since the fund started, they were up over 1,500%. Woo! That is amazing. That's entertained. No wonder he was getting such a big following.
SPEAKER_00And I think I do think actually it's important to take a pause there because so he has a $45 billion hedge fund at the point that we see the collapse. So he starts off with $235 million. He raises, obviously, after his success in 25, he raises a lot more money. And he's raising more and more money along the way. So of that $45 million, some did come from growth, but also a lot of it came from raising new money from investors that were seeing this success and wanted to get in on the
How Leverage Multiplies Returns
SPEAKER_00party. Right. Right.
SPEAKER_02And ultimately, I think the question that a lot of people ask, myself included, is how do you achieve a 1,500% rate of return in effectively two, two and a half years? Because I I don't know, we've been investing in AI-related things ourselves. I certainly haven't gotten a 1500% rate of return. No. And I think what it ultimately comes down to that a lot of people don't realize is the fact that they used leverage. And they used leverage pretty heavily. Why don't you give an ex uh give our listeners an example of how that can impact returns both on the good side and on the negative side?
SPEAKER_00So let's just take, let's create a case study here. So let's assume that you had a billion-dollar fund. Okay. You have a billion-dollar fund, and we there are reports that Leopold was using roughly 4x leverage. So what does that mean? That means on a billion dollars of equity, he had borrowed $4 billion to go out and between his shorts, which means betting against the stocks, as well as the other stocks he owned, he owned roughly $4 billion of additional equity or shorts. So he had a total investment portfolio of $5 billion while he only had a billion dollars of actual money. So in a situation like that, let's just assume that he had to pay 10% per year to borrow that billion dollars. Exactly. That's the cost to borrow the money. Um, there are also requirements for collateral coverage. You have to have a certain amount of collateral when you're borrowing that money. We're going to talk about that a little bit more later. But let's assume that your base portfolio has a return. Let's say you pick great stocks, your shorts do well, the stocks you're betting against go down in value, so you make money on those as well. Let's say that you make a 50% rate of return over the course of that year. So let's do that math. On the first billion dollars, your equity, your money that you've put in, you make a clean $500 million in profit. Not too bad. Great outcome. That's a great outcome. But where the magic comes in, or maybe a better way to put it is the high octane fuel comes in. Is now you also make that 50% on the $4 billion of debt. But you have to pay the interest cost on it. So you don't make 50%, you make 40%. So 40% of $4 billion is $1.6 billion. Right. So we take that $1.6 billion, we add it to the $500 million that we made on our equity, our actual piece of the pie, the non debt piece of the pie, that results in a total gain. Gain of $2.1 billion on the original $1 billion investment that we actually made.
SPEAKER_02So our 50% return actually turns into a 210% rate of return over that year.
SPEAKER_00Exactly.
SPEAKER_02That's a massive uh expansion of our original return that we could have gotten.
SPEAKER_00It does. And this is a concept that our an average American really doesn't understand. This is why a lot of sophisticated people will use leverage because it does have the ability to amplify returns. But as we see, as we will see here in just a little bit, it also has the ability to cut the other way as well.
SPEAKER_02Yeah, it's it's a added risk. Yes, there's no free lunch. It's a two-edged sword.
SPEAKER_00Yeah. It cuts both ways. It can both work in your your to your benefit, but it can
When Leverage Turns Against You
SPEAKER_00also work against you.
SPEAKER_02So let's think about that negative example. Let's say we have that same billion dollars and we have four times leverage on it. So we have a $5 billion investment. Let's say that our investment drops just 20%. If you had no leverage, your original investment would be $800 million. But with $4 billion of leverage, you still have to pay that 10% interest costs. And so in addition to that, you have a 20% loss. So instead of it being a 20% loss on that $4 billion, it's really a 30% loss because you have to pay the the cost of the debt. So if you think about a $30 billion or sorry, a 30% loss on $4 billion is $1.2 billion. Now hold on a second. We started with $1 billion. So at this point, we're now seeing not only a loss of everything that we have, you add that to the original $200 million loss on the starting investment that we have, our original investment, we're talking about a $1.4 billion loss on a $1 billion portfolio. You're declaring bankruptcy at that point. It's completely imploded. And our loss wasn't that significant. You know, the actual stock return was only down 20%. That's not an uncommon thing to see.
SPEAKER_00Absolutely. And if you think about this in the context of like a retiree, you know, over the course of a 20 or 30 year period of time, you're going to have four, five, six, twenty to forty percent losses. And it, while it is challenging, it is definitely something that could be managed through. But when you use large amounts of leverage, like Leopold was using with the hedge fund here, you are playing with fire. It's high octane jet fuel on the right up, but it's an explosive bomb going off that devastates everything in its sight as a portfolio starts to drop in value meaningfully.
SPEAKER_02This is how things can implode quickly. You can see great returns when things are good, but if you have the perfect storm, or even just a normal storm, it can, if you're if you're overlevered, it can really cause things to implode. Hey everyone, if you're enjoying the insights that we're bringing on this channel, do us a huge favor and hit the subscribe button on Apple, Spotify, wherever it is that you listen to your podcast. It takes two seconds, is completely free, and helps us continue to bring you high quality content.
The Collapse Begins
SPEAKER_02Okay, so now we kind of come to the apex of the story here. We enter July, kind of July 1st, the fund is up 439% for the first six months, and the winds really begin to change. You know, all these AI stocks that Leopold has been really heavily investing in and betting strongly uh in their favor, uh really start to turn around and turn around sharply. In the month of July, we see a lot of these AI stocks drop upwards of 50%. And you know, a lot of us say, What are you talking about? It doesn't seem like the broader stock market has experienced that. Well, if you look at the Nasdaq, which is kind of more that tech heavy index, it was down about 10% in that month at its worst. But when you think about you know some of the more AI specific stocks, which is what Leopold was heavily investing in, those were down upwards of 50%. And that was only one facet of what occurred here. In addition to that, he had all these stocks that he was betting against, which we call shorting. And at the same time that we saw the AI stocks drop, the stocks that he was betting against did
How Short Selling Made Things Worse
SPEAKER_02really well.
SPEAKER_00Exactly. So you really had the worst case scenario happen. Everything that you were betting on and wanting to move forward in price retreated, and at the same time, everything you were betting against and hoping would decline went the other direction. Right. I think it's important for us to, for our listeners who aren't familiar with shorting, to explain what that process ultimately looks like. So the what shorting ultimately is is I will borrow a stock from another investor, and then I immediately sell it at what the you know current price is. So let's say that the price of the stock we're talking about is $100. I'm betting that over time the price of that stock is going to decline. Maybe let's say it drops to $80. Well, at that point, I can then buy that stock at $80 and then give it back to the person that I borrowed it at. I pay them a cost to borrow that stock over that period of time. So I would, I made $20 because I sold it at $100. I bought it back at $80, and then whatever the cost was for borrowing the stock from the person net of that, that's what profit I ultimately get to make. And that's important because when you're shorting a stock, it does naturally push the price down further because you initially sell, and when you when there are more people selling than buying, it causes the price to go down. But when you unwind a short, meaning you actually buy the stock to give it back to the person you borrowed, you actually then encourage upward momentum at that point.
SPEAKER_02Yeah, so there's basically this kind of reinforcement loop or this circular motion that occurs where, oh no, the stock's moving against me. So let's say in your example, it went from 100 to 110. Now we're out $10 in that respect. So we say, well, we better buy it back. We have to cover our position. Cover our short to give it back to the person to prevent further losses. And when we're buying it back, it's driving it up even further because that's more buyers in the market.
SPEAKER_00So effectively, what you're saying is whenever a short goes bad, meaning I'm betting against the stock, I'm hoping it does badly. If the stock does what we the opposite of what we hope, and it actually goes up in value, getting out of that short actually, in most cases, tends to make things even worse. Right. Because you're effectively being forced to buy the stock you were shorting to give it back to the person that you were borrowing it from in that situation. Yeah.
Margin Calls and Forced Selling
SPEAKER_02Another concept that has kind of a similar effect, and you mentioned it earlier, and I think it's a good time for us to circle back to it, is this concept of collateral and how much collateral is required by the bank essentially in our uh the leverage component. So we're borrowing money to go buy more stocks, or I should say Leopold is the bank requires you to maintain a certain percentage of leverage, or I'm sorry, of collateral when you're taking out this leverage.
SPEAKER_00That's right. And so once again, thinking back to the example of leverage we used earlier, when things go bad, it can quickly cause the prices of things to go down. Well, what is your collateral in this case? This is not uh lending money on a home where the value stays right. The value is literally changing on a second by second basis. So your collateral can meaningfully drop in value quickly. And that's exactly what happened here is let's just say theoretically, as an example, that you're required to keep 25, you're supposed to have one dollar of collateral for every $3 on your original loan. Well, guess what happens? When you start to see some of these kinds of losses at the level that we're talking here, a lot of your collateral gets completely wiped out in those situations. But and this introduces this other concept where there's this concept of maintenance, where the banks have the right to tell you that you need to start selling things in order to raise cash in order to make sure that the collateral is secure.
SPEAKER_02Basically, the bank is saying, hey, your collateral's getting smaller. Yes. And we need you to do one of two things either add more money to increase that collateral, or you got to sell out and close this position so that we don't risk losing our money.
SPEAKER_00Exactly. And so what does that activity do? When the bank is telling you you need to, and at this point, guess what? Situational awareness is taking on the debt because they don't have more money. Now they are trying to raise money during this whole process, which is a whole nother interesting piece of this story, but they're not able to raise enough. So guess what? They have to start selling off their positions, which does what? It causes the stock down. Uh on a regular ongoing basis.
SPEAKER_02So in Leopold's situation, we've got to remember that all this is really occurring in a very short period of time. Technically, it all occurred in the month of July, but it really came to a head in the last week or two of July. And Leopold's getting this pressure from the banks that, hey, we're getting to the point where we really need to start closing out some of these positions. And instead of going force it.
SPEAKER_00If you like you have responsibilities during that maintenance period to get there, but if you get to a point, they will they have the ability to literally just sell everything.
The $16 Billion Fire Sale
SPEAKER_02And cover their their risk. Yes. And so Leopold makes the decision. He says, listen, I'm done with this leverage game at this point, and we need to stop the bleeding. So we're going to close out our shorts, we're going to cover, you know, pay off all of our debt. And I just want to own a portfolio of paid for stocks.
SPEAKER_00Fully owned stocks and private investments.
SPEAKER_02And we're going to stop the bleeding. And so what he did was instead of going out and issuing a sell order for all of his billions of dollars of publicly traded stocks, he makes the decision to kind of have this auction process.
SPEAKER_00And I think it's important to understand the reason why. Why did he do that? If you the and this is something a lot of investors don't really understand, when you see that the price of a stock is X, that does not mean you could sell as much of that stock as you want at that price. That just happens to be the next price that someone's willing to pay for a relatively small portion of it. So for someone like Leopold, who owns really large positions in some of these stocks.
SPEAKER_02And he needs to liquidate it quickly.
SPEAKER_00He needs to liquidate it quickly. If he were to just say sell all, it most likely causes the stock not just to have a small drop, but in in some cases, especially the smaller names, it could cause the price of the stock to plunge. Yeah.
SPEAKER_02And so a fire sale type of situation.
SPEAKER_00Exactly. And so in this situation, he needs somebody who is willing to come in and buy a really large chunk all at once so that he doesn't force the market down at an agreed-upon price. At agreed upon price. And that's positive for the person that's looking to buy it because on the flip side, if they want to buy a really large chunk, what causes that? What does that happen cause to try? It drives up the price. It drives the price up meaningfully. So there is a positive side of things here. And on top of that, you know, as a distress seller, he's going to have to sell it at a discount as well.
SPEAKER_02Right. And so in many cases, the buyers have the advantage there, but it helps it helps Leopold as well. Exactly. And so he goes out and has this auction process among three big financial firms: Citadel, Jane Street, Millennium, and ultimately Citadel apparently comes back with the best bid. And he ends up selling we don't know the exact transaction price, but it's reported that the value of the uh stocks that he sold off to Citadel was about $16 billion worth. It was the vast majority of the publicly traded stocks that he owned.
SPEAKER_00And I think one other thing that's really important, just to kind of backtrack just a little bit, part of the reason we even got to this point was he did have some very large holdings in his private investments. So again, remember, he's got about a $5 billion position in Anthropic. He's got a large position in Mad X. But when you are making a margin loan, when you have a margin loan in place, most firms will not count any of your private holdings that's in your collateral because you can't sell them like that.
SPEAKER_02That's right. They got to be able to go in there and sell them and cover their risk.
SPEAKER_00Exactly. And so as a result, what ended up being a huge boon to Leopold early on and really boosting returns with Anthropic and Mad X ultimately comes back to be a challenge because these assets, which are a big portion of the fund, cannot actually be used as collateral in this
Down 67% in One Month
SPEAKER_00process.
SPEAKER_02So taking us back to that weekend with Citadel's purchase, really this nightmare situation for the Situational Awareness Fund for Leopold himself and for their investors ultimately finds some resolution. He's able to get you know billions of dollars in liquidity, pay off all of his debts, close all of his shorts, and after the dust settles, in one month, he's down 67%.
SPEAKER_0067%.
SPEAKER_02Now, what's interesting about that is he was up 439% for the first six months. So because he had such significant returns there in the beginning, even though he dropped 67%, it's reported that he's still up about 80% for the year. Now, that is true if you were an investor right at the beginning of the year. But if he hadn't been up that much to start out the year, or if somebody invested later on in the year and didn't experience that for 39% return, you're I mean, this is a bankrupting type of event.
SPEAKER_00Oh, sure. Anybody who was in in got in at the end of June was in a really they they did experience a full 67% drop.
SPEAKER_02Yeah, I mean, you get in with I think the reported minimum for his investments there were millions of dollars, right? Five, ten million dollars. So if you're in with that amount of money and you lose sixty-seven percent in one month, what a disaster that is. So tying this all together, I think there are some real lessons that we can take from this real tragic story uh for Leopold and the Situational Awareness Fund. And I think the lessons that we can take away, uh one of them, at least in my mind, is that leverage is like playing with fire. It can really help us in certain situations, uh when when the winds are in our favor. But the real tra or the real danger or risk associated with leverage is that when things turn around, they don't have to turn around that much, if you have a lot of leverage, it can really cause things to implode and cause them to implode very quickly. So if you're investing in anything that utilizes leverage, recognize the risk that you're taking. And the more you take on, the more risk that introduces.
Lessons Every Investor Should Learn
SPEAKER_00Yeah, I think it's important to recognize you have we as investors have to have a prudent approach to leverage. Yes. It doesn't mean that we never use it. It's embedded everywhere in our financial system. Whenever an individual buys their first home, they don't buy it all cash. They do take on leverage. But in that case, the structure of that leverage, how it all works, all of those things matter in a material way. Take an average home buyer. If an average home buyer goes out, and let's say that they put 10% equity down when they go and they buy their home, they are taking, they're doing 9x leverage. That's right. Leopold was doing four, but there's huge structural differences in the leverage of a homeowner versus the leverage that Leopold ultimately took on. First, individual homeowner has to apply for the mortgage, has to satisfy the requirements, gets approved once. And guess what? As long as you make those payments, you can't have your home taken away from you.
SPEAKER_02Yeah, the bank can't come in and force you to sell your house.
SPEAKER_00Bingo. And in most cases, the interest rate that you're paying on it is a set rate. And so over time, you continue to pay, and over 30 years, you're gonna ultimately end up owning that home. So that's a very different situation than Leopold's situation, where literally on a daily, if not hourly basis, the bank or the financial firm in this case is literally checking what's the value of what you have versus the amount of debt you have. And it's a constant calculation that at any point in time, they can rip the rug out from underneath them and say, hey, the investments are down, our collateral is no longer enough, you have to sell the whole thing and permanently impair your investment. Permanently impair, meaning your losses are actually realized.
SPEAKER_02Yeah, that's that's the thing that is most painful about this situation. You know, when you're not using leverage, if you're down 20%, you wait a few months and you're probably gonna recover a lot of that. When you have this sort of situation, you have what you describe as permanent impairment. You've sold out of the position now. And so even if it does come back, you're out of it. You're taking advantage of it. Exactly. And so this is this is unrecoverable type of uh loss or uh pain that you've experienced in this in this situation.
SPEAKER_00I think an interesting way of putting this is when you have either no leverage or very limited leverage, you have staying power. You are not in a situation where you're likely to become a forced seller. You can ride the waves, and whether it takes a few months or a few years to recover, you can afford to be patient. When you have the amount of leverage that Leopold ultimately had, you couldn't have any patience because the person who makes the decisions around everything is your debt holders. That's right. Not you as the investor in that situation. And so the point is this leverage is everywhere in the financial system. And if you may be like, no, well, I don't have any leverage, I'm not like Leopold, I don't have debt on mine. Yes, you're right. Uh you probably for many people they are not using leverage to go out and buy stocks. Some are. And I would I would strongly caution people and be aware of the risks that you're taking on by taking on margin to ultimately buy more stocks. But even if you do not, leverage is everywhere in the financial system. Individual businesses have leverage, um, debt funds have leverage
Why Understanding Leverage Matters
SPEAKER_00have leverage. The structure of that leverage, the amount of that leverage, those things are incredibly significant. Um, and they can result in portfolios that should have done really well ultimately blowing up. In fact, you know, I want to give an example of this. Back in 2020, we we, in fact, we talked about this in an earlier episode in our investment uh foundation series on the 6040. We talked about how um during 2020 there was a liquidity crunch. And during that liquidity crunch, um, we saw some really high quality bonds, specifically mortgage bonds, drop precipitously in value. When that happened, there was a very common practice at the time where there were these investment funds that would go out and buy these mortgages and they would take on a lot of leverage. And so in the midst of that crash, and you when you saw a 60% drop in the values of these mortgages, guess what happened? Those companies, their margin got called. Yep. They were forced to sell. I saw several mortgaged, uh, mortgage-backed lending companies that saw their investment drop 70 or 80 percent. Wow. And it never came back.
SPEAKER_02Yeah, it's irrecoverable.
SPEAKER_00It's irrecoverable because at the end of the day, when they were forced to sell to be able to pay back their loans, they were forced to sell and they couldn't ride things back up. It took a year and a half to two years to recover most of those loans' values. And those investors that were in those funds never got a chance to recover, predominantly because they did not understand the extent of the leverage that they had there and the risk that they were taking in the event of a large drop.
SPEAKER_02Yeah, it's two things because one, it's the value of the stock drops or the loan drops, and you're not in it for the recovery. But the other thing is the loss that you experienced was levered, right? So you experienced a a magnified loss, but even if you were to be stay invested in those loans and they recover, they don't recover to the same magnitude of the loss that you experienced because you're not levered anymore. Yes. And so it's uh it's a real tragic situation when you find yourself in that situation. And that that's the real lesson that we can take away from this is be very aware of the investments that you're making and that you're getting involved with, and make sure that you understand the amount of leverage that is being that is being employed
Don't Chase Extraordinary Returns
SPEAKER_02by the fund.
SPEAKER_00I think the other important lesson here is don't be return chasers. Yeah. Always be looking for sound investments that make sense over the long term. There were a lot of people that invested with Leopold's track record, and those who the investors that invested late in that June, May, April round are probably not that happy right now. I feel a little sorry for Leopold because literally the weekend that this hall was unfolding, he ultimately was getting married. So the guy is dealing with probably one of the most stressful periods of his entire life, right? As he's about to try to celebrate, hopefully, one of the best days of his life. Um, but there were investors that got absolutely hammered, specifically the ones that were on the later end, that June, May, and April timeframe. Um and it's a lesson for us as members of an investment committee that steward a large number of households overall wealth. But it's also a lesson for individual investors as well. Always come back to fundamentals. Make sure you do not just get caught up with the green eyes whenever you see really, really good returns and chase them, because oftentimes there can be reversals and especially the really big ones like this 439% in six months. There is almost always a reason when you have incredibly large outliers. And leverage in many cases is one of those predominant causes.
SPEAKER_02And unfortunately, when you've had those really great returns, that's when people get excited and start jumping in. And a lot of times that's right before uh something completely unwinds. So some really good lessons for us to be uh to take away from this story today. An unfortunate situation, but hopefully we're able to get some good out of it by uh taking these lessons and applying them in our lives.
SPEAKER_03The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. Investing includes risks, including fluctuating prices and loss of principal. Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA, and SIPC, the Fox Alliance Wealth Advisors is a separate entity from LPL Financial.