Leopold Aschenbrenner’s important lesson for the rest of us
A flailing hedge fund took Wall Street by storm this week. Situational Awareness, a hedge fund run by Leopold Aschenbrenner and known for its leveraged bets on AI stocks, experienced a massive flushing out during July’s AI stock drawdown.
After rising 270% from the start of the year through May, the Wall Street Journal reports Situational Awareness’s fund was down 67% in July. Things became so dire that Aschenbrenner ended up selling the bulk of the public stock portfolio to Ken Griffin’s Citadel.
The key reason things unwound so quickly for Aschenbrenner and Situational Awareness was leverage. The fund didn’t just bet on a variety of AI names. It juiced those bets with leverage.
That works great when the stocks are going up. But it helps it all unravel that much faster when things are falling. At a time when new leveraged ETFs are hitting the market seemingly every day, the quick unwind of Situational Awareness highlights that trading with leverage isn’t for the faint of heart. Even for those who dare, the easiest way for a self directed investor to put all the roulette chips on black like Situational Awareness did is through buying these new 2X or 3X ETFs. Those aren’t nearly as intuitive as the name suggests.
I first wrote about leveraged ETFs back in October after a friend had told me he was holding a 2X Nvidia ETF. The problem with my friend “holding 2X Nvidia” was that these funds aren’t really meant to be held at all. They reset everyday. So particularly if a stock is volatile, you don’t actually get “2x” the stock’s return over a certain time frame by simply holding a leveraged ETF attached to it.
“These are extremely volatile,” Strategas senior ETF and technical strategist Todd Sohn told me back in October. “They’re only meant to be held for a day, and there’s a massive amount of risk, like they can blow up, and you can lose all your investment in one day.”
Here’s a look at the performance of Sandisk (a Situational Awareness holding) and SNXX, a 2x long Sandisk ETF that launched on Jan. 28 of this year.
The leverage is great on the way up. At one point this year the 2x ETF was up over 1,000%. But look at what happened in July. If you held this thing every day just to try to capture 2X Sandisk’s performance, you got clobbered. After the brutal month, the charts since Jan. 28 have essentially converged.
Here’s what it looked like if you tried to hold the 2X ETF through just July.
At the bottom in July, your Sandisk investment would’ve been down 70% instead of the 42% the actual shares had fallen. I for one don’t have the stomach for that.
Investors often use a phrase about volatility being the price you pay for the market gains along the way. The Situational Awareness fiasco reminds us that once you include leverage, the price you pay becomes a lot larger and the bill comes to the table a lot sooner.
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Our senior technical analyst Doug Busch thinks our Palo Alto Networks pick is primed for another move higher.
Here’s part of Doug’s take:
“Since then, PANW has pulled back to test its rising 50-day simple moving average, an area that often attracts buyers in strong uptrends. Back-to-back spinning-top candles over the last two sessions suggest selling pressure may be fading. A successful hold here could pave the way for a move to $400 by year-end, representing roughly 27% upside from current levels. We remain bullish above $295.”
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