Leopold Aschenbrenner, the founder of AI-focused hedge fund Situational Awareness, has admitted that his firm “let investors down” after suffering a 67% loss in July, saying he takes “full responsibility” for a month that brought the fund close to what he described as “permanent capital impairment.”
In a letter to investors, Aschenbrenner acknowledged that while the fund ultimately protected investor capital by removing leverage, it should never have reached such a vulnerable position, Business Insider reported. He said the experience had left the firm with “very expensive scars” that would become “invaluable lessons” for the organisation.
“We let you down this month,” Aschenbrenner wrote, adding that although a solution was found to protect the fund and its investors, “our intention in running the fund is to never find ourselves in such a position in the first place.” He stressed that volatility is part of investing, but said the fund must always be structured to withstand losses and “fight another day.”
Portfolio was restructured after sharp July sell-off
According to Business Insider, the letter follows a dramatic collapse at Situational Awareness after steep declines in AI-related stocks triggered margin calls on the firm’s leveraged positions.
The hedge fund, launched in early 2025 with less than $1 billion, had reportedly grown to around $45 billion by the beginning of July. Aschenbrenner, a former OpenAI researcher with no prior experience managing money, had borrowed heavily to amplify bets on companies including SanDisk, SK Hynix and CoreWeave. Those holdings fell sharply during the month, forcing the firm to unwind much of its public equity portfolio.
Explaining the events to investors, Aschenbrenner said the July drawdown worsened as several core AI positions fell by half or more, while the fund’s long-short strategy also reversed sharply. Although the month was unusually volatile, he said the firm held itself “to a higher standard, irrespective of market conditions.”
He also described a feedback loop in which stocks publicly associated with the fund faced increasing selling pressure. As those dynamics intensified, he said, the situation became “essentially similar to a bank run,” where growing vulnerability fed further weakness. The fund tried to keep the portfolio within its risk limits, but rapidly falling prices and deteriorating market liquidity made that increasingly difficult.
Leverage removed to protect investors
Aschenbrenner said that on Wednesday night into Thursday morning, the firm took “decisive action” to safeguard limited partners by selling part of its public portfolio in a block transaction.
This eliminated all leverage from the fund, closed every short position and ended its reliance on portfolio financing, he wrote. The remaining public portfolio is now fully paid for, consisting of long stock positions and fully paid options without margin or liquidation risk.
He said those steps restored stability and allowed the firm to preserve its private investments, including its stake in Anthropic, while continuing to operate as a hybrid public-private investment fund. “I take full responsibility for these events,” Aschenbrenner wrote in the letter cited by Business Insider.
Through acknowledging that a significant decline was expected given the sharp correction in AI stocks, he said such losses should never have jeopardised the fund itself. “We embrace volatility. But it should never jeopardize the fund,” he wrote.
Risk management changes planned
Looking ahead, Aschenbrenner said the coming weeks would be devoted to strengthening the firm’s portfolio management, risk team and internal oversight to improve resilience against future market shocks.
He warned that AI could continue to fuel market volatility for years, making stronger risk controls essential. While describing the recent losses as costly, he pledged that the experience would not be wasted.
“My core promise to you is that we will not waste the opportunity to learn from these events,” he wrote, adding that his goal is to emerge as “a wiser and stronger investor.”
Despite the steep losses, Aschenbrenner told investors he remains optimistic about the investment landscape, arguing that AI fundamentals continue to improve even as stock prices have fallen significantly. He said the current environment presents an attractive opportunity set.
Fund remains positive for the year
Aschenbrenner also sought to reassure investors that the fund has not been shut down, liquidated or converted into a private-only vehicle. Instead, it will continue operating as a hybrid public-private fund, though its public portfolio will remain fully paid for as the firm reassesses its approach to risk. He added that nearly all of his personal wealth remains invested alongside clients in the fund and offered one-on-one calls with investors to discuss the events in greater detail, according to the letter reported by Business Insider.