Situational Awareness AI, the hedge fund led by Leopold Aschenbrenner, lost approximately 67% of its value in July. This resulted from margin calls forcing the fund to sell its public portfolio. The collapse of such a fund raises questions for equity investors about the outlook for the second half of 2026. Despite accurately forecasting AI demand, the fund narrowly avoided catastrophe, making this event significant not just for one hedge fund manager.
Whether tech sector volatility will persist going forward is one of the key questions facing markets as the year draws to a close. The same companies that fueled stock index rallies can fall swiftly once leverage and liquidity decline, as July demonstrated.
Why a Winner with 439% Gains Lost Two-Thirds in a Month
Situational Awareness was founded by a former OpenAI researcher and had achieved 439% returns using roughly 4x leverage based on concentrated bets on AI infrastructure and chips. However, this leverage had its drawbacks. When its positions fell 35-47% in July, three major brokers, including Goldman Sachs and JPMorgan, demanded margin, which the fund could not meet, leading to the sale of its entire public stock portfolio by Citadel.
Reports confirmed the 67% drop in July and the sale of the fund's controlling stake in publicly held shares. According to Aschenbrenner, the company explained that the fund is prepared to 'continue the fight' and framed the decline in terms of risk, not investment strategy.
BREAKING: The full letter Leopold sent to his investors last night.
— Leopold Stock Trac (Trac) July 31, 2026
Leopold Aschenbrenner's fund fell 67% in July but is still up 80% year-to-date, and he announced he will continue investing in public equities. https://t.co/n3Swjmp8Z6 pic.twitter.com/jswe9ROkTo
'We welcome volatility. But it should never endanger the fund.' And the company has not left the industry, investing $400 million in Source Foundry, a lithography-focused chip startup valued at nearly $5 billion, specializing in the bottleneck of chip manufacturing, an area monopolized by ASML.
Demand Was Real, but Financing Was Lacking
The mistake was not the bet itself. According to documents, nearly half of the fund's US portfolio by the end of June was in companies like SanDisk and Micron, just as demand for memory chips was rising. Counterpoint Research found that enterprise solid-state drives accounted for 48 percent of total NAND sales globally in Q2 2026, during the transition of AI workloads from training to inference. Furthermore, TrendForce forecasts that NAND prices will rise 10-15 percent quarter-on-quarter, and DRAM chip prices will rise 13-18 percent quarterly.
Micron strengthened its market position with statistics, reporting an unprecedenteddentof $41.46 billion in revenue for its fiscal Q3 compared to $9.30 billion a year ago. However, this did not help the hedge fund. The Philadelphia Semiconductor Index fell nearly 30% from its June peak, and the aggressive position did not allow for waiting out the recovery suggested by demand data.
Central Banks Note Similar Leverage Buildup
The stated weakness wasdentby regulators even before the Situational Awareness case. A Bank of England Financial Stability Report published in July 2026 highlighteddentrisk of a 'significant increase in leverage on equity markets,' with particular focus on the stretched valuations of a small number of AI-linked companies. The Bank for International Settlements cited the 2021 collapse of investment fund Archegos and the 2022 UK liability-driven investment (LDI) stress to insist that non-bank funds take steps to avoid events like Aschenbrenner's. Expertsdentthat the greatest issues lie in leverage and concentration risks.
Essentially, the pattern remains the same: the right ideas, but the wrong form and method of implementation without any liquidity buffer.
Will Institutional AI Trading Persist?
A key question remains open for 2026 to address: how will the resulting gap be filled? JPMorgan suggests the tech sector may still retain a leverage effect that fueled its past rise and that levered ETFs, options, and margin accounts might still be in the stabilization phase. Such programming is expected to further shift the balance of demand for tech stocks between leveraged and unleveraged, with investors de-risking. According to PitchBook, real asset fundraising related to infrastructure, energy, and data centers reached a record $206.6 billion in 2025, with fund managers favoring long-duration structures and contracts,tracto leveraged directional investments.
AI investment volumes are not shrinking. Goldman Sachs estimates spending on computing power, data centers, and energy will total about $7.6 trillion. What changed in July is how much risk the market is willing to absorb and whether the next downturn will be met with patient capital or if highly leveraged equity holders will be forced to sell.
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