The market just got a reminder that even the smartest money can blow up quickly.
An AI-focused hedge fund named Situational Awareness lost most of its value in a matter of days last month. Now regulators want to know exactly what the banks involved were doing while it happened.
The fund, run by former OpenAI researcher Leopold Aschenbrenner, was built around a handful of big, bold bets on AI-related stocks. It used borrowed money to make those bets much larger, a strategy known as leverage. At one point, the fund's borrowing hit up to 400% of its own money, which means even a small drop in its stocks could trigger big trouble.
That trouble arrived in late July. The late-July tech sell-off reduced the fund's assets from roughly $45 billion to about $10 billion. The losses triggered multiple margin calls, which are demands from the banks that lent it money to put up more cash or sell positions to cover the loans. When the fund could not meet those demands, it had to unload most of its large, concentrated stock positions, including stakes in SK Hynix and CoreWeave, at fire-sale prices.
The Securities and Exchange Commission has reportedly issued subpoenas to several major Wall Street banks as part of an inquiry into the fund's collapse. According to Reuters, the banks include Goldman Sachs, JP Morgan, Citigroup, and Bank of America.
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The subpoenas are requests for information, not accusations. Regulators are looking into the fund's trading activity, its use of leverage, and its communications with the banks that served as its lenders. The SEC's inquiry may end without any enforcement action, and the subpoenas do not imply any wrongdoing by the banks or the fund.
"It is to be expected that regulators would closely examine any public profiles, produce significant payouts, or have particularly dramatic drawdowns," Situational Awareness said in a statement. "We are a highly-regulated business and will cooperate fully with any regulatory request."
Goldman Sachs, JP Morgan, and Citigroup declined to comment. CNBC also reached out to Bank of America. The New York Times was first to report on the subpoenas, which arrive as the SEC takes a closer look at how AI hype and borrowed money can interact in unexpected ways.
While the fund was forced to sell, someone else was ready to buy. The giant global fund Citadel scooped up those low-priced positions at a reported discount of around 10%.
In a Friday investor letter, Griffin said Citadel has since sold roughly 80% of the risk tied to the AI fund's portfolio. That means the firm that bought the pieces has already moved most of them off its book.
Here is the twist: SK Hynix and CoreWeave shares have recovered since the sell-off. The panic that forced the fire sale has eased, which raises a question that is uncomfortable for anyone following the AI trade: was this a one-time mess, or a more serious problem when borrowed money piles into a hot sector?
This episode is not isolated. The AI trade has attracted massive inflows and heavy borrowing across the industry. When a single fund's leverage unravels, it can expose how interconnected the market is, as banks and other funds are forced to react quickly. Regulators are paying close attention to how these positions are financed, and whether the recent volatility signals deeper cracks in the AI investment boom.
For cautious investors, the lesson is more about market structure than a single hedge fund. Markets can freeze quickly when leverage is involved, and the same AI boom that created enormous gains also left behind enormous, sudden losses. The banks are big enough to withstand the pressure, and the fund is working with investigators, but the episode is a real stress test for how the AI trade is being financed.
The takeaway for you is simpler than it might seem. When stock prices climb because of debt, they can reverse just as quickly. The same math that makes a concentrated position exciting on the way up is what makes it troublesome on the way down. That is worth remembering the next time a fund with a three-word name grabs headlines.
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