The artificial intelligence (AI) sector has been a powerhouse of growth in the stock market, but it also brought about a dramatic fall for some high-profile investors. In mid-2026, AI stocks surged to new heights, but that same momentum led to steep declines for certain hedge funds. Leopold Aschenbrenner, the 24-year-old founder of Situational Awareness, an AI-focused fund, saw his assets under management (AUM) drop from $45 billion to $10 billion in less than a month. People with knowledge of the situation confirmed the decline, which came amid a major shift in the fund’s strategy. Situational Awareness reportedly sold the bulk of its stock portfolio to Citadel, a well-known investment firm.
At its peak, the Situational Awareness fund delivered gains of over 1,000% since it launched, making it one of the most successful AI funds of its time. Investors were eager to capitalize on the massive potential of AI to transform industries and economies. But success often comes with risk. Aschenbrenner reportedly used extreme leverage—up to 400% in certain positions—to amplify returns. While this strategy worked well during the AI boom, it also exposed the fund to significant losses when the market began to shift.
AI-Driven Market Growth
Over the last four years, AI became a dominant force in global financial markets. The S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite all hit record highs, largely due to the optimism surrounding AI and its transformative potential. However, the rapid rise also triggered dangerous patterns. More money flowing into AI meant more leverage being deployed. By June 2026, the total amount of margin debt in the U.S. had hit a staggering $1.502 trillion, a 77% increase since April 2025. This surge in borrowed money is a key warning sign for investors and market analysts.
Margin debt is a critical indicator for Wall Street. It shows how much money investors are borrowing to invest in or bet against stocks. A sharp rise in this debt often signals that investors are either becoming overconfident or are under pressure to take bigger risks. Historically, when margin debt increases by 65% or more in a short period, it has preceded major market corrections. These spikes indicate that the market may be overheating and nearing a peak.
Margin Debt and Past Crises
There have been three major instances in the past where surges in margin debt were followed by severe market crashes. From March 1999 to March 2000, the dot-com bubble collapsed after margin debt rose by 80%. The S&P 500 fell nearly 50%, and the Nasdaq Composite lost three-quarters of its value. Then, between June 2006 and July 2007, just before the financial crisis began, margin debt increased by 66%, leading to a 57% drop in the S&P 500. These events show the risks that come with overleveraging during market booms.
The most recent spike in margin debt happened between March 2020 and October 2021, when it jumped 95% due to government stimulus and pandemic-related spending. Though markets soared during that time, the Nasdaq Composite lost one-third of its value in 2022, signaling the start of a bear market. Each of these episodes revealed the same pattern: investors using borrowed money to chase high returns, only to face significant losses when the market turned against them.
Aschenbrenner’s Legacy in Question
Situational Awareness in Crisis
Situational Awareness is now in 'crisis mode,' according to a report. The fund sold most of its stock portfolio to Citadel amid major losses. Some speculated that Citadel or short-sellers were responsible for the fund’s collapse, but the real issue appears to be leverage. Situational Awareness had built concentrated positions in one of Wall Street's most popular trades: owning companies expected to supply the chips, data centers, power and other infrastructure behind the AI boom while betting against software firms viewed as vulnerable to the technology's disruption. Its long positions were concentrated among some of the market's biggest AI beneficiaries. Public filings showed large stakes in Nebius, Bloom Energy, Sandisk, CoreWeave, SharonAI and IREN as of March 31. By Wednesday's close, those shares had fallen between by 50% and 78% from recent peaks. At the same time, software stocks like Adobe that had been used as the short leg of the trade rallied. That meant the fund wasn't protected by its hedges. Instead, the longs and shorts lost money simultaneously. As the value of the portfolio fell, the fund's equity cushion shrank and its prime brokers demanded additional collateral. Raising cash required selling more holdings, adding further pressure to sliding stocks and generating additional losses. What might otherwise have been a painful drawdown became a deleveraging spiral. Ken Griffin's Citadel hedge fund reached a deal to buy the fund's publicly traded assets.
The broader issue extends beyond one fund. Entire segments of the financial market are built on borrowed money, and Aschenbrenner’s failure highlights the risks of such a system. If AI stocks experience a significant retracement, the consequences could be far-reaching. Investors and market participants are now watching to see whether the pattern will repeat itself, and whether the current surge in margin debt will lead to another correction in the near future.