For the better part of the last four years, nothing has captured the attention and capital of investors quite like the artificial intelligence (AI) revolution. This multitrillion-dollar opportunity is the greatest technology advance since the advent of the internet, and it's single-handedly responsible for blasting the Dow Jones Industrial Average (^DJI +1.71%), S&P 500 (^GSPC +1.79%), and Nasdaq Composite (^IXIC +2.59%) to new heights.
But hot trends also encourage outsize risk-taking -- a lesson that Leopold Aschenbrenner, the lead investor behind AI hedge fund Situational Awareness, learned the hard way last week.
Leverage is all fun and games until it amplifies your losses. Image source: Getty Images.
Situational Awareness sends ripples through Wall Street
In the two years leading up to last week, the 24-year-old Aschenbrenner's AI-focused fund was a superstar. At its peak, Situational Awareness had $45 billion in assets under management (AUM) and had rallied more than 1,000% since its inception.
But as of July 30, according to people familiar with the matter via CNBC, total AUM had plunged to around $10 billion. While some have postulated that short-sellers or an opportunistic Citadel, which purchased Situational Awareness's portfolio amid its troubles, are to blame, there's something far more sinister behind Aschenbrenner's downfall: leverage.
BREAKING: Situational Awareness sold "the bulk" of its stock portfolio to Citadel after "big losses in AI," per WSJ.
-- The Kobeissi Letter (@KobeissiLetter) July 30, 2026
The hedge fund, which reportedly had a net asset value of $45 billion on July 1st, is now in "crisis mode," WSJ reports. https://t.co/5M4yUgvOrg
According to various reports, the hot-shot fund manager was utilizing up to 400% leverage in some of his fund's positions. Given the parabolic move higher in AI stocks, an inevitable retracement was a dangerous proposition that, in hindsight, led to the sale of Situational Awareness's stock portfolio to Ken Griffin's Citadel.
But Aschenbrenner's use of leverage isn't a one-off problem on Wall Street -- it's endemic.
Image source: Getty Images.
Outstanding margin debt is going parabolic
Every month, FINRA publishes the amount of outstanding margin debt at U.S. brokerages. "Margin" is money an investor borrows from their broker to short-sell (wager against) or purchase securities. When used to buy securities, it's a form of leverage, similar to the leverage Leopold Aschenbrenner employed in his fund.
Historically, when outstanding margin debt rises by 65% or more over a short time frame, it's signaled imminent disaster for the stock market. In other words, when investors dramatically increase their willingness to take risks, bad things happen.
Total Margin Debt hits $1.5 Trillion, a new all-time high 🤯 👀 pic.twitter.com/1IXqZGgrqs
-- Barchart (@Barchart) July 20, 2026
Between April 2025 and June 2026, FINRA data shows that outstanding margin debt has soared 77% to an all-time high of $1.502 trillion. The previous three times over the last three decades that outstanding margin debt skyrocketed were disastrous for the stock market:
- March 1999 to March 2000: Margin debt increased by 80% in the lead-up to the bursting of the dot-com bubble. The S&P 500 and Nasdaq Composite lost 49% and 78% of their respective values.
- June 2006 to July 2007: Over this 13-month period immediately preceding the start of the financial crisis, margin debt jumped 66%. The benchmark S&P 500 lost 57% of its value from peak to trough.
- March 2020 to October 2021: Outstanding margin debt soared 95% over 19 months, fueled by COVID-19-related fiscal stimulus. The 2022 bear market wiped out a third of the Nasdaq Composite's value.
There's arguably no greater red flag on Wall Street than a parabolic rise in outstanding margin debt. Situational Awareness may be just the tip of the iceberg.
