BIS cites hedge fund meltdown in new warning on leverage

JPMorgan Chase ↗ 0.76% has ended its lending relationship with Situational Awareness, the AI-focused hedge fund founded by former OpenAI researcher Leopold Aschenbrenner, after the fund lost roughly 67% of its value in July, according to Reuters. The move came as the Bank for International Settlements on Monday cited the fund's near-collapse as a warning about the growing role of leveraged hedge funds in global markets.theedgemalaysia+1

JPMorgan had been one of the fund's key lenders through its prime brokerage business. After the losses, the bank notified Situational Awareness that it would terminate the relationship, a source familiar with the matter told Reuters. Goldman Sachs ↗ 0.92%, Citigroup ↗ 0.23%, and Bank of America ↗ 0.21% remain active brokers for the fund, which has also recently started working with New York-based brokerage Clear Street. All four major banks declined to comment, and Situational Awareness did not respond to Reuters' requests.aol+1

From $45 Billion to Fire Sale

Situational Awareness went from managing roughly $45 billion in assets to around $10 billion after a historic momentum reversal triggered losses on both sides of its portfolio and set off margin calls. The fund had employed leverage of up to 400%, with long positions in AI infrastructure stocks like SK Hynix and CoreWeave falling sharply while short positions in software companies rose instead of declining. "We let you down this month," Aschenbrenner wrote in an investor letter in late July, as reported by The Wall Street Journal. Ken Griffin's Citadel acquired much of the fund's public stockholdings at a discount.writeforusmanhattan.wordpress+3

BIS Sounds Alarm on Systemic Risk

The BIS quarterly review released Monday highlighted the episode as part of a broader warning about leverage in financial markets. "Increased use of leverage across various markets is a concern, as it has the potential to amplify ordinary market movements into significant disruptions," said Frank Smets, the BIS's head of economic analysis and statistics. "The failure of a highly leveraged AI-focused hedge fund serves as another reminder of these risks."theedgemalaysia

Gaston Gelos, head of financial stability policy at the BIS, told reporters that hedge funds are now "at the core of the core markets," creating "a fragile situation" dependent on "high leverage, short-term leverage and liquidity that is good in good times, but that can disappear very quickly."theedgemalaysia

The warnings follow a speech last week by the BIS chief on how the AI boom threatens financial stability, and build on the institution's June assessment of vulnerabilities in leveraged markets. Whether the broader resilience of risky assets can be sustained "especially if upward pressures on yields continue, remains however uncertain," Smets said.theedgemalaysia