SEC Subpoenas Big Banks in Probe After AI Hedge Fund’s Leverage-Fueled Collapse
Summary
- The US Securities and Exchange Commission (SEC) has sent subpoenas to major banks as it seeks materials related to AI-focused hedge fund Situational Awareness (SA).
- SA, which made heavy use of leverage, saw the value of its portfolio fall 67% last month as AI-related stocks tumbled and margin calls were triggered.
- SA sold most of its stock portfolio to Citadel at a discount, and the SEC said it has not accused SA of wrongdoing so far.
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The fallout from last month’s selloff in artificial-intelligence stocks is spreading to Wall Street. The US Securities and Exchange Commission has sent subpoenas to major banks as it examines trading records tied to AI-focused hedge fund Situational Awareness, or SA, which suffered heavy losses on leveraged bets.
The New York Times and other media reported on Aug. 24 that the SEC asked banks that traded with SA to hand over materials related to the fund’s use of leverage and the timing of trades that triggered margin calls. The regulator is seeking to determine what communications SA had with its lending banks as it borrowed money to expand its positions, and which trades led to margin calls. It also instructed the banks to preserve all information related to SA.
A margin call occurs when a lender demands additional collateral after the value of pledged assets falls below a required threshold. SA managed more than $30 billion in assets and borrowed tens of billions of dollars more to invest. Its main lenders included Bank of America, Citigroup, Goldman Sachs and JPMorgan.
The hedge fund was founded by former OpenAI researcher Leopold Aschenbrenner and grew rapidly during the AI boom. Its aggressive use of leverage later backfired. As shares of AI companies fell last month, SA’s losses mounted quickly. At the same time, losses deepened as technology stocks the fund had bet against rose.
The value of SA’s portfolio fell 67% last month, according to the report. SA sold most of its stock portfolio to rival Citadel at a discount. After AI and semiconductor shares rebounded, Citadel sold more than 80% of the stock positions it had acquired.
The SEC has filed civil lawsuits against investment firms that suffered large losses. As of Aug. 24, however, SA had not been accused of wrongdoing. “It is reasonable to expect regulators to closely examine funds that generated substantial gains or recorded steep losses,” an SA spokesperson said. “We will cooperate as fully as possible with any request from regulators.”
Son Ju-hyung, Hankyung.com reporter, handbro@hankyung.com
Korea Economic Daily
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