July 31, 2026: Situational Awareness
The lessons of history are there for those that care to learn from them. Another hedge fund, this one called Situational Awareness, suffered massive margin calls in the week beginning July 27, 2026, when its “liquidity cushion” was insufficient to meet the calls.
As I show in my book Famous Frauds and Financial Failures, the lack of a sufficient liquidity cushion, which is what sank Lehman, is often at the root of a financial failure—whether it’s a very large, listed company (Enron—see Chapter 2), a big crypto exchange (FTX—Chapter 3), a hedge fund (Amaranth—Chapter 5, LTCM—Chapter 6, and Platinum—Chapter 8), or a family office (Archegos—Chapter 4).
Hank Paulson, U.S. Treasury Secretary during the GFC, has written: “Larger amounts of higher-quality capital and larger liquidity cushions are the best defences against failures, and liquidity is even more important than capital.”
The Situational Awareness fund was founded in 2024 by a 25 year old hedge fund manager called Leopold Aschenbrenner. Aschenbrenner has been a high-flying investor, known as the “Nostradamus of AI”, and the fund's assets had grown to more than US$40 billion on the back of a series of aggressive bets on the AI boom—funded by leverage and borrowing. The late July 2026 rout in AI stocks forced Aschenbrenner into a fire sale of his fund’s assets—after massive margin calls from the lending banks and inadequate risk management at the fund. Aschenbrenner reportedly had to sell his portfolio of listed equities (valued at around US$16 billion) to Citadel—which saw an immediate upswing in prices starting on Friday, July 31.
In a letter to investors, sent on Thursday, July 30, Aschenbrenner said he took “full responsibility” for the July events that had led to the more than 60% plunge in the value of its assets. He said he would make it his “mission to ensure that we learn the necessary lessons from this experience.” Aschenbrenner formerly worked at FTX, so one would think he knew something about liquidity crunches. In a personal twist, the crisis struck in the same week that Aschenbrenner was getting married and instead of a honeymoon he spent the first few days of married life fielding calls from investors.
The Situational Awareness fund continues to operate, and the fund is apparently still up over 80% for the year (even after the flash crash). It has a large portfolio of private company AI investments and, while it won’t exit public equities altogether, it will no longer borrow money from banks to juice its bets.
“On the face of it, what happened is simple: Aschenbrenner thought AI-related stocks would go one way; they went the other. Since he’d funded his trades with debt, this quickly turned into a liquidity crunch.” John Foley, The Financial Times
Sources:
Mourselas, Costas, Aliaj, Ortenca, & Shah, Jill R. (2026), “Leopold Aschenbrenner Vows to ‘Fight Another Day’ after Fund Plunges 67% in July,” The Financial Times, July 31: https://www.ft.com/content/a0a5e3a7-c4e6-42a6-9a7b-a780422bcd76?syn-25a6b1a6=1
Foley, John (2026), “Situational Awareness Got the Future Right but Misread the Past,” The Financial Times, August 1: https://www.ft.com/content/20af5836-51b0-4a37-a820-9de1583a18b4?syn-25a6b1a6=1
Roig, Jonathan (2026), “Did-citadel-just-rug-pull-leopold,” LinkedIn post, August 2: https://www.linkedin.com/posts/jonathanroig_did-citadel-just-rug-pull-leopold-share-7488674363463086080-labF/?utm_source=share&utm_medium=member_android&rcm=ACoAAAAQdawBxqvT82Q42p7hRMI-kn3qCgHaZ50
Chapter 3: FTX update, June 12, 2026
On June 12, 2026, Sam Bankman-Fried failed in his bid to appeal against his fraud conviction in the FTX case.
A three-judge panel of the New York-based Second U.S. Appeals Circuit, rejected Bankman-Fried's argument that he was improperly prevented from introducing exculpatory evidence at his trial.
Bankman-Fried has now submitted a formal application for a pardon from the U.S. President “after completion of sentence.” Bankman-Fried has been using social media and interviews from prison to lobby for a pardon from Trump, who has pardoned or commuted the sentences of other white-collar defendants in his second term.
Bankman-Fried is serving a 25-year prison sentence over the collapse of the FTX cryptocurrency exchange he founded and is being held at a low-security federal prison near Santa Barbara, California. He is eligible for release in 2044.
No Author Listed (2026), Sam Bankman-Fried loses bid to appeal against fraud conviction in FTX case, the Guardian, June 12: https://www.theguardian.com/business/2026/jun/12/sam-bankman-fried-loses-appeal?CMP=Share_iOSApp_Other
Roy, Yash (2026), "Bankman-Fried Quest for Trump Pardon Hits Congress Pushback," Bloomberg, June 17: https://www.bloomberg.com/news/articles/2026-06-17/bankman-fried-s-ques…
Chapter 7: Petters update, June 12, 2026
On June 12, 2026, a U.S. bankruptcy judge approved the Chapter 11 bankruptcy of auto parts maker First Brands, allowing it to move ahead with litigation against the company's indicted founder and other insiders in an attempt to recoup money for creditors. Further echoes of Petters' Ponzi scheme 2008!
Knauth, Dietrich (2026), First Brands Moves Ahead With Liquidation Plan," Reuters June 12: https://www.reuters.com/legal/litigation/first-brands-moves-ahead-with-liquidation-plan-2026-06-13/