Name: The Risk-Amplifying Strategy That Led to Big Losses at Situational Awareness
Uploaded: 2026-08-15T16:00:00Z
Duration: 4 min 13 s
Description: WSJ’s Peter Rudegeair explains what Wall Street calls a ‘Texas hedge’ – and how the Situational Awareness hedge fund used it to bet big on artificial intelligence.

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WSJ’s Peter Rudegeair explains what Wall Street calls a ‘Texas hedge’ – and how the Situational Awareness hedge fund used it to bet big on artificial intelligence.

https://m.wsj.net/video/20260815/d61f1326-b7b8-4536-85a0-1d371ba20857/3/hls/manifest-hd-wifi.m3u8

The Risk-Amplifying Strategy That Led to Big Losses at Situational Awareness

Situational Awareness made a lot of money.

Why are we talking about it so much?

The implosion of Situational Awareness.

For a while, it did look like this guy was a genius.

And it quickly lost a lot of money.

Yes, talk about a rollercoaster.

Thanks in large part to a tactic known as the "Texas hedge." Here's how that worked. For Situational Awareness, they had a belief that AI is gonna transform the economy. And as it diffuses through the economy, certain companies are gonna benefit and certain companies are gonna lose. So Situational Awareness' strategy was to go long the stocks of AI winners. Being long a stock is just you're betting that it's gonna go up. So who is the founder of Situational Awareness? It's a 24-year-old named Leopold Aschenbrenner. Leopold Aschenbrenner is not your typical hedge fund manager. In fact, he had no prior professional investing experience. Before starting the hedge fund, he was very famous for writing an essay called "Situational Awareness." 165 pages about the future of AI. He got a cult following from that. Everyone from Michael Dell to Ivanka Trump tweeted it out.

We saw how much sort of ChatGPT unleashed, right? And so like every generation, you know, the models are going to be kind of crazy and people, it's gonna shift the Overton window.

Precocious is definitely one word that you can use to describe Leopold. So what is a Texas hedge? It's a bit of a misnomer because it's not a hedge at all. Typically, when you're hedging something, you want to decrease your risk or your exposure to some event. Texas hedge actually doubles down or increases your exposure. So to give an example, let's say you want to make a bet on the future price of oil in the stock market. Maybe you would go long an airline. You think oil prices are going to decrease, airfares will get cheaper, more people will fly. To Texas hedge that, maybe you go short ExxonMobil. And ExxonMobil drills for a lot of oil, lower prices are bad for it. So the Texas hedge phrase actually originated in cattle. A lot of Texas cattlemen who owned, you know, large herds of cattle and made their living from that. Some of them tried to reduce their exposure to cattle price in the future in financial markets. They would take an offsetting position either with futures or options that would benefit if the price of cattle declined. The cattlemen who were employing the Texas hedge actually did the opposite. They took positions in financial markets that would benefit if the price of cattle rose. There are three common ways investors get into trouble. They can hold too much concentrated investments in just a few companies. They can borrow too much and have too much leverage, or they could take too much risk investing in illiquid securities. Situational Awareness did a bit of all three. For a while, it worked really well, right? Their returns were stellar through May of this year. We've reported they were up over 1,000% after fees since inception in 2024. But when you have that much leverage, it really doesn't take much to cause it to unwind and cause you to have to cut your risk, sell positions. And at the end of July 29th, that Wednesday, they realized they needed a more permanent solution. So they had discussions with Ken Griffin, who's the founder of Citadel. Citadel is one of the largest hedge funds in the world, about $71 billion in assets under management. And they really have reputation for kind of stepping in, in times of stress for other hedge funds and taking the problem off their hands, obviously for a price.

Situational Awareness is back in business. Sources telling Bloomberg that the hedge fund has completed a $400 million investment.

Leopold Aschenbrenner and Situational Awareness, they aren't going anywhere anytime soon. Still have a very large private portfolio of venture capital bets, Anthropic being the biggest one, but also stakes in companies like Fluidstack. And they still have a public equity book of stocks. A pretty amazing stat in all of this is Situational Awareness told its investors on July 30th that it was down 67%, a staggering decline. What's also pretty staggering is the fund is still up 80% on the year, even including those losses. Investors can tolerate a lot if you still make the money. And I think he's gonna have a lot of loyal people who still think that he has the right nose to sniff out where AI is headed.