5 ms·
Situational Awareness and the Impending Stock Market Volatility
- andiey 2mo agoIt's a good reminder that there are many ways you might interpret Citadel's intervention...from everything I've read, it seems that everyone wants to believe this is a bullish position on AI.
- Yummiy 2mo agoHow does it actually work under the hood?
- cl42 2mo agoYou'll have to clarify -- do you mean the fund, or our hypothesis on reflexivity and the value of AI assets?
- m101 2mo agoMichael Burry's substack answers this in his articles over the last week. It's along the lines of there are a number of market players that are taking on similar position in the market. These market players use leverage. Because of how many players there are, and the different levels of leverage involved, if the market goes against these crowded strategies there tends to be a sharp unwind against these funds. People know this dynamic exist, and so when the unwind slows down they jump right back in there as the forced selling stops and re-levering occurs again.
- dgellow 2mo agoHow does what work?
- lz400 2mo agoI think the collapse of SA is very simple (as long as I'm not wrong about it of course hehe). SA weren't geniuses, they weren't sophisticated. They just did the same thing everyone else did, all in on semi-conductor, AI and memory positions. They got great returns because 1) everyone got great returns and 2) they were leveraged through their ears. In fact, not only they weren't geniuses, they were pretty bad at risk management, so bad that the first mild drawdown triggered margin calls on their over-leveraged bets and they couldn't cover them. TLDR: SA didn't have alpha, they just looked good through over-leveraged beta and got caught
- jfrbfbreudh 2mo agoThey were the alpha. Leopold called the boom in 2025 and returned 200% in 2025. He unfortunately got caught with his pants down.
- lz400 2mo agoI mean, so many people also went in on the boom, that's why it's a boom. Leopold somehow got it 100% right and _still_ managed to go bust
- wiejee 2mo ago[dead]
- blitzar 2mo agoThat was just leveraged beta.
- deleted 2mo ago[deleted]
- freeone3000 2mo agoShoot, I called the boom in 2020 and returned 700% over the last six years. Where’s my fund? :P
- antasvara 2mo agoEven in the optimistic case where SA did have alpha, the position sizing was way out of whack. Based on the volatility of the stocks they were buying, the Kelly Criterion meant you'd need to expect a 900% annual return on the stock before leverage to justify being 4x levered. What guys like Leopold either don't understand or understand but ignore is that being right directionally and being right on market timing are two different skillsets. When you've juiced a stock by 800%, the existence of alpha pales in comparison to your vulnerability to the stock market.
- bko 2mo agoThis fund returned 47% in its first 6m and over 400% prior to the downturn. I don't understand how the investors didn't realize this was going to blow up. Returns like that are not asymmetrical and can only be produced with leverage, at least when you're trading paper. When something is inevitable and there is a large enough position, this makes adversarial attacks likely. Every small drop causes an amplified amount of pain to the investor which causes them to liquidate positions furthering the decline. SA doesn't have the history or relationships yet to endure margin calls. I don't see the edge these companies have when they're just going long a very particular position, namely anything related to AI. Long term value in finance is made in a couple of ways. For instance, relationships & being able to source deals (lots of PE firms), short term trading infrastructure and knowledge (Renaissance), capital and clout to make favorable deals (Buffet), etc. Even then the skills are fleeting as employees leave taking knowledge and companies raise money to compete. Buying Nvidia on leverage is not a long term strategy. Especially when all your investments are common stock and obvious.
- anonym29 2mo ago>This fund returned 47% in its first 6m and over 400% prior to the downturn. >Returns like that are not asymmetrical and can only be produced with leverage This is simply untrue. Just because the path to doing so is much more clear in hindsight doesn't mean it wasn't possible. Sandisk is still up 110.82% in the last 6 months, and that's after a drawdown that's now approaching 50% from peak. Over the last year, they're up 2730%, and again, this is after the drawdown. Zero leverage.
- gizajob 2mo agoThe skill in the stock market, and the value of any kind of investment fund, is producing good returns over an actual long-term period. YOLO-ing once before imploding in one of the biggest bull markets ever can be done by any gambling degenerate out there.
- anonym29 2mo agoI don't disagree at all with what you're saying, but it has nothing to do with what I said, which is strictly a refutation of the assertion that it's only possible to achieve a 47% return in 6 months or 400%+ return in ~2 years with leverage.
- trash_cat 2mo ago"The forces that destroyed SA were also what generated its 4×+ return"...yes, that is what levrage means? And it goes both ways. The interesting part what this article states: SA was essentialy a thematic ETF without any hedging to buffer downside, and got margin called.
- deleted 2mo ago[deleted]
- Recursing 2mo agoAll comments here are written as if Situational Awareness blew up, but it seems like it didn't and is up 80% YTD https://nitter.net/tbpn/status/2083226453509030285 https://nitter.net/tbpn/status/2083226453509030285 All the stuff that it was forced to sell to Citadel is also up ~10%-30% since the sale
- drexlspivey 2mo agoThe public book went to 0 and LPs lost everything. The 80% number is a result of blending the Anthropic stake (+620% YTD, 25% of NAV) and the public book (-100%, 75% of NAV) = +80% YTD
- deleted 2mo ago[deleted]
- blitzar 2mo ago> All the stuff that it was forced to sell to Citadel is also up ~10%-30% since the sale and Citidel took it all at a multiple billion dollar discount to the prior close
- ChrisMarshallNY 2mo ago"Impending"? Has anyone looked at the Business section, lately?
- intrasight 2mo agoMy first thought as well. My second was the lack of situational awareness.
- MarkusQ 2mo agoThey could have named the company "Irony", but that would have required situational awareness.
- DontchaKnowit 2mo agoI mean VIX is decreasing currently
- drdrek 2mo agoThis article is stating the obvious that is written in many different places (except the ETF angle) while sounding like its some kind of expert being ignored. I would presume AI is afoot. Stopped writing the comment, went and clicked the logo, yup a personalized AI reporting service.
- cl42 2mo agoAuthor here. There is absolutely no AI used in any of the writing I do. We use AI to track news and better understand global and economic developments.
- antasvara 2mo agoJust to jump in: Citadel buying this portfolio says nothing about how Citadel feels about the stocks. It's the bread and butter of large HFT hedge funds; if you see someone that has to sell stock, you leverage the fact that you can buy all of it to get a discount versus the asset value. Reports are saying that Citadel was able to buy the portfolio for ~10% under the market value, all at once. That's a no-brainer because you both get a discount and avoid driving the price down by buying small pieces over the course of a week.; If I were a betting man, I'd bet that Citadel was also selling to Situation Awareness while they were on the way up. At some point, SA had juiced their stock prices so much that no "rational" investors (those that have a view of the stock based on some amount of fundamentals) would be on the other side of the trade. It's retail investors, bandwagon investors, and Citadel-caliber funds. This situation (over-leveraged company blows up due to some volatility) happens all the time in commodities trading, which is where Citadel started.
- ddevnyc 2mo agoDo you believe this might have been Citadel grooming SA to implode like that?
- isubkhankulov 2mo agoSA likely didnt lever up with Citadel, it did so via prime brokers which are the big banks (MS, GS, JPM, CS, and/or DB)
- antasvara 2mo agoThey might not have known it was SA specifically. That being said, they definitely knew a large fund with leverage was buying these stocks. The mechanism here (and I'm not an expert) is: 1. SA wants to buy stock with leverage. You do that through a major bank via total return swaps. Essentially, SA pays X% of the value on $100 of stock (for 4x leverage you'd pay $25) plus an ongoing financing fee (call it 5% a year), then you get the return/loss on that $100 of stock. SA was in these agreements with JPMorgan and Goldman Sachs. 2. The bank, because they don't want to actually hold that risk, goes out and buys $100 of stock. 3. Citadel and others see JPMorgan buying lots and lots of this stock. That's confusing, because normally JPMorgan wouldn't be making a huge directional bet on a stock. They deduce that a large fund is buying the stock. 4. Citadel starts widening their spread (the difference between what they'll buy a stock for and what they'll sell it for). They hedge some of this as best they can, or temporarily live with the risk. 5. SA, the highly leveraged fund buying volatile stocks, inevitably blows up because volatile stocks swing around in price. A dip causes margin calls. 6. JPMorgan or Goldman need to sell the stock fast, because SA is close to dipping below their required margin (i.e. SA paid $25 for $100 in stock exposure, the stock drops to $90, JPMorgan asks for more money because the stock went down by too much). 7. Citadel offers to buy all of the stock from JPMorgan. Because they're doing it in one big block, JPMorgan doesn't lose money selling on the open market (once you start selling, each successive sale is for less money because there are more people selling than buying). Citadel is compensated for this by getting a discount to the asset value (the stock is worth $90, Citadel gets to buy it for $81). So Citadel didn't do anything to "set up" SA. But because they're hyper-aware of market dynamics, they would have known that someone is going to need to sell stock if the market takes a turn on these names.
- didntknowyou 2mo agocathy’s ARK was also a hot genius moment in a bull market, now it’s another average option
- RoundingError1 2mo agoIt's like LPs forgot what a hedge fund's actual purpose is.