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Happy Friday! South Korea’s Kospi index logged its biggest ever one-day gain, jumping 18% after a brutal selloff over the last three days. Entire countries are moving like meme stocks.

In-depth: How a high-profile hedge fund blew up betting on AI.
Newsbites: Rates held, yields up, and Chinese stocks down.
PensionCraft News: Terry Smith's troubles, unsolved market mysteries, and how to invest a lump sum at different ages.

IN-DEPTH

Hedge Fund Blowup: Margin for Terror

Everyone’s nervous about AI. And can you blame them?

This month an experimental OpenAI model escaped confinement, chained together countless vulnerabilities, and hacked open-source platform Hugging Face. Claude, not to be outdone, published a booby-trapped package to the public Python registry and stole the credentials of the very company tasked with scanning packages for malware. And a Californian start-up just unveiled a two-metre-tall centaur robot designed to operate in disaster zones.

Uh, was the face necessary? Were the horns? Was the chainsaw?!

Investors are also nervous about AI. But mostly because the Nasdaq-100 dipped into correction territory — its own kind of apocalypse.

Blessed are the bottlenecks

Market reckonings often start the same way. Namely, a hedge fund hotshot blows up betting other people’s money on the thing that may or may not be a bubble.

The hedge fund in question is Situational Awareness, which was effectively liquidated this week for failing to notice what was going on around it.

Their thesis was simple: building a machine god will require an enormous amount of physical stuff. Things like memory chips, transformers, and gas turbines. So you buy the physical bottlenecks and short the software companies whose margins the machines are about to eat.

For eighteen months it worked spectacularly. The fund went from $225 million in seed money to more than $20 billion in assets under management, and was up 439% in the first half of this year alone.

You can probably guess what happened next.

Das Wunderkind

Leopold Aschenbrenner has an interesting CV. He moved to the US from Germany at the age of 15 to study at Columbia University. He graduated top of the class. He did a stint at the FTX Future Fund, resigning before the crypto exchange imploded. He joined OpenAI's Superalignment team and was fired in April 2024 for what the company called an "improper disclosure of internal information". Then, in June 2024, he published a 165-page viral essay: ‘Situational Awareness: The Decade Ahead’.

What he had not done, at any point, was work a single day as a professional investor. Goldman Sachs, JPMorgan and Bank of America let him lever up the fund four times anyway.

Leverage doesn’t look so clever when the market moves against you. This month, the AI infrastructure stocks Situational Awareness had piled into — SK Hynix, CoreWeave, Nebius, Micron, Bloom Energy — fell between 35% and 47%. Simultaneously, their software short positions went bad. Adobe rose more than 5% a day, three days running.

Everyone wants to run a hedge fund. Nobody wants to do any hedging.

It didn’t take long for his prime brokers to issue margin calls. A desperate dash for cash was underway.

Ken's ransom

Aschenbrenner sent a letter to existing investors pleading for fresh capital. He offered up assets for sale. But a piecemeal approach is tough to pull off when you’re up against the clock. Especially when Goldman is the one watching the second hand tick down.

In the end, Ken Griffin's Citadel — a mammoth hedge fund — swallowed Situational Awareness’s entire public equity book. In one big gulp.

Griffin has made a career from picking over the carcasses of his competitors, offering pennies on the dollar for their portfolios. He previously profited from the collapse of hedge funds Sowood Capital and Amaranth Advisors, and the downfall of discount brokerage E*Trade. When quantitative hedge funds hit the rocks in 2007, Griffin called Cliff Asness of AQR Capital. Asness, who lived to tell the tale, later described the call: "I looked up and saw the Valkyries coming and heard the grim reaper's scythe knocking on my door."

After the fire sale, what remains of Situational Awareness is a $5 billion stake in Anthropic, a smattering of private investments, and a letter to investors. "We let you down this month," it said. Aschenbrenner compared the experience to a bank run and blamed short sellers, as these things must. He also told investors that he had removed all leverage from the portfolio. Better late than never.

His final indignity arrived the same day. The AI infrastructure stocks hoovered up by Citadel rebounded sharply, as often happens when the biggest forced seller is taken care of.

The Situational Awareness portfolio was up double-digits the day after they got liquidated. Welcome to Wall Street, kid.

It’s easy to feel schadenfreude — Aschenbrenner is, after all, just 25 years old and extremely wealthy. But he’ll be fine. His investors, less so.

It’s a disaster zone. Send in the chainsaw-wielding centaur.

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NEWSBITEs

The Fed and Bank of England both left rates unchanged. The Fed held its target at 3.50–3.75% on a 9-3 vote, while the BoE voted 6-3 to hold at 3.75%, with every dissenter wanting a hike. Governor Bailey insisted the Bank was not "edging towards a hike". Nothing to see here, said the man being voted against by his own chief economist.

30-year US Treasury yields hit a 19-year high. The long-end reached 5.26%, its highest since 2007, with the 10-year at 4.73%. Fed Chair Kevin Warsh has scrapped forward guidance, but a widening fiscal deficit amid an energy shock tells its own story. Holding rates is easy. Holding down bond yields, not so much.

America's economy slowed just as Europe's perked up. US GDP grew at a 1.5% annualised rate in the second quarter, well short of the 2.1% forecast. A drop in government spending, plus slowing investment and exports, dragged down the number. Meanwhile, the eurozone expanded 0.4% in Q2—a similar annualised pace to the US—double expectations and a sharp rebound from a flat first quarter. Still, August is coming.

Chinese stocks headed for their worst month in a decade. The CSI 300 lost almost 9% in July, while the tech-heavy STAR 50 dropped 28% after surging 75% over the previous three months. Chipmaker ChangXin Memory’s $8.6bn IPO and subsequent 466% surge crowned it as mainland China's most valuable listed company, and drained liquidity from an already jittery market. Chips with dip.

Nvidia agreed to invest $5bn in Safe Superintelligence, the secretive lab founded by OpenAI's former chief scientist Ilya Sutskever. The deal gives SSI access to Nvidia's Vera Rubin chips, expanding its compute tenfold within 12 months… despite the two-year-old startup having no product, no revenue and no published research. Which, to be fair, is more than some AI companies.