By COMFORT OGBONNA
WASHINGTON — The U.S. Securities and Exchange Commission has sent subpoenas to several Wall Street banks that worked with Situational Awareness, seeking information about the artificial intelligence-focused hedge fund’s trading activity and use of leverage before its near-collapse last month, according to a person familiar with the matter.
The regulatory inquiry follows a sharp reversal in the fund’s highly leveraged bets on technology and semiconductor companies, which were hit by a broad selloff in global chip stocks.
Situational Awareness was ultimately forced to sell most of its publicly traded equity portfolio to Citadel after the market downturn put significant pressure on its positions and triggered margin calls.
The SEC is examining the timing of trades that contributed to those margin calls as well as communications between the hedge fund and some of its major lenders regarding its use of borrowed money to finance trades.
Among the banks involved are Goldman Sachs, JPMorgan, Citigroup and Bank of America, which have provided financing and other services to hedge funds and institutional investors.
Situational Awareness said it expected regulators to examine a fund that had attracted significant attention because of its strong returns and subsequent dramatic losses.
“We are a highly-regulated business and will cooperate to the fullest extent with any regulatory request,” the firm said.
The SEC and the banks declined to comment on the matter.
The regulatory scrutiny does not necessarily mean that authorities have concluded that wrongdoing occurred. Requests for information and subpoenas can be part of a fact-finding process, and receiving such a request does not by itself mean that a company or financial institution is the target of an enforcement action.
Situational Awareness was founded in 2024 and is led by Leopold Aschenbrenner, a former artificial intelligence researcher who gained prominence after publishing a widely circulated essay about the future development of AI.
The fund built a reputation for making aggressive investments in companies expected to benefit from the rapid expansion of artificial intelligence. Its concentrated bets produced substantial returns and helped draw attention to the relatively young investment firm.
But the strategy came under severe pressure in July when a sweeping selloff in AI-related stocks caused the value of the fund’s portfolio to plunge.
The fund told investors that its portfolio value fell 67% in July alone, sharply reversing earlier gains and creating significant pressure on positions that had been financed with borrowed capital.
Aschenbrenner acknowledged in a letter to investors that the fund had come dangerously close to suffering a permanent loss of capital.
He said the firm ultimately found a solution to the crisis but acknowledged that the situation had gone further than the fund considered acceptable.
The episode highlights the risks faced by hedge funds that use leverage to increase the size of their market positions.
Borrowing allows investment firms to make larger bets than would otherwise be possible, potentially magnifying gains when trades move in their favor. However, leverage can also accelerate losses when markets move against a fund.
When the value of securities backing leveraged positions falls sharply, lenders and prime brokers can demand additional collateral through margin calls. If a fund cannot meet those demands, it may be forced to sell assets quickly, potentially driving prices lower and worsening its losses.
That dynamic appears to have played a major role in the pressure faced by Situational Awareness during the July market selloff.
The SEC’s interest in the fund’s trading activity comes as regulators continue to monitor the increasingly complex relationship between hedge funds, major financial institutions and rapidly expanding AI-related investments.
The investigation could provide regulators with a closer look at how the fund built its leveraged positions, when those trades were executed, how lenders responded as markets deteriorated and how the resulting portfolio sales were handled.
However, no conclusion about wrongdoing has been announced, and the inquiry could end without enforcement action.
For Situational Awareness, the regulatory scrutiny adds another challenge after a period in which its investment strategy went from producing outsized gains to suffering one of its most severe setbacks.
The fund has maintained that it cooperates with regulators and remains focused on its investment business following the market turmoil.
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