There was a lot of news last week about a hedge fund called Situational Awareness. It is run by a 24 year old called Leopold Aschenbrenner, who built a portfolio valued at $45 billion from his investments in AI companies. It had to be bailed out by Ken Griffin’s Citadel after some of its investments plunged in value and its lenders started looking for their money back.
While the fund is still going and actually showing gains for the year to date, there are lessons that can be learnt from what happened.
Situational Awareness borrowed heavily. For every dollar of investment money, it borrowed three. When things go well, that will supercharge your returns. How does that work?
Let’s say I am going to invest €1 million and I borrow a further €3 million at 5% interest. The fund returns 10% a year and pays the 5% interest from the fund. At the end of ten years, the fund is worth €6.6 million. I repay the €3 million capital and have €3.6 million. Compare that to if I just invested €1 million with no borrowing, I would have €2.6 million at the end, so I have made €1 million extra by borrowing.
Sounds like a no brainer. But as us Irish know, the debt always has to be repaid. What if things don’t go well? If there is a major crash of -40% in the year 2 before compounding has taken effect, your €1 million investment is reduced to just €276,000 at the end of 10 years (€415,000 if you didn’t borrow).
Messing around with the numbers and running difference crash scenarios, it is clear how susceptible you are to timing…which is out of your control. Depending on when there is a fall in value can be the difference between being completely wiped out of not. Even if you survive the initial fall, anymore falls and your investment is toast.
Investing in one industry brings increased risk and rewards. We have seen that with the NASDAQ over the last 15 years, where it has produced really great returns. But when the tech industry had a downturn, you felt the impact as there was no other industries to prop up your investment. When tech fell in 2022, the energy industry did really well and cushioned the falls for those invested in global equities.
Situational Awareness picked a new sector of the tech industry, AI. While the growth of this sector is unbelievable, it is a new sector, so the returns are going to be volatile. No one really knows what form AI will take in the world as it progresses and is developed. The companies making the most money at present are the hardware companies selling the chips needed to develop AI. The software companies aren’t making money yet, so there is always an increased risk of volatility. Add in the leverage and you really are taking massive risks with your money.
Funds like Situational Awareness aren’t open to retail investors but there are leveraged ETFs in specalised sectors available on online accounts. People always take the optimistic view when they invest and if you are looking at leveraged ETFs, you are most likely looking at those supercharged returns without looking at how a big fall can completely wipe out your investment.
Building wealth takes time. Stay away from leveraging and invest in a diversified basket of quality stocks.
Steven Barrett
10 August 2026