Key Takeaways
- • Hedge funds had borrowed nearly $3.7 trillion from banks as of midyear 2026, the highest level in more than a decade and roughly three times the pandemic-start level in 2020, according to the Treasury Department.
- • Situational Awareness, the AI-focused hedge fund founded in 2024 by Leopold Aschenbrenner, pushed its lenders to raise leverage to 10 times investor capital from four times, per The New York Times.
- • Lenders forced a distressed sale of roughly $20 billion in stocks to Citadel at a discount after AI stocks fell sharply over the summer, shrinking the fund from about $45 billion at its July peak to roughly $10 billion.
- • The SEC issued subpoenas to Goldman Sachs, JPMorgan, Citigroup and Bank of America about their dealings with the fund, and has proposed easing some hedge fund borrowing disclosure rules.
- • Bank for International Settlements economic analysis head Frank Smets said the near failure was a reminder that forced sales by leveraged funds could trigger a wider market selloff.
Summary
Hedge fund borrowing from banks reached nearly $3.7 trillion by midyear 2026, the largest figure in over a decade and roughly three times the level recorded when the pandemic began in 2020, according to the U.S. Treasury Department as reported by Quartz and The New York Times. The figure has renewed scrutiny of Situational Awareness, the AI-focused hedge fund that nearly collapsed this summer.
According to The New York Times, Leopold Aschenbrenner founded the fund in 2024 without prior experience at an investment firm. The eight-person operation had only about half its staff dedicated to managing investments. Goldman Sachs, Bank of America and other major Wall Street banks nonetheless lent the firm tens of billions of dollars, enabling a concentrated position in AI-related stocks. The firm's executives reportedly pressed multiple lenders to raise leverage to ten times investor capital, up from four times, citing a banker familiar with the negotiations.
When AI stocks dropped sharply over the summer, the firm's lenders demanded repayment, forcing a distressed sale of roughly $20 billion in stocks to Citadel led by Ken Griffin, at a discount. The fund, which had grown to about $45 billion at its July peak, was left with around $10 billion in assets after the sale closed. Around that time, the Securities and Exchange Commission sent subpoenas to Goldman Sachs, JPMorgan Chase, Citigroup and Bank of America seeking information about their dealings with the firm.
Regulators have framed the episode as a broader warning. Frank Smets, who leads economic analysis and statistics at the Bank for International Settlements, said the near failure of an AI-focused hedge fund "served as another reminder of these risks," according to The New York Times, noting that heavily leveraged funds forced to sell could trigger a wider market selloff. The S&P 500 has logged 27 all-time closing highs this year and has returned 158 percent on a total-return basis since 2020, a rally the leverage has helped fuel.
The SEC has proposed easing some reporting rules requiring hedge funds to disclose borrowing levels to regulators. Senator Elizabeth Warren, the top Democrat on the Senate Banking Committee, said the move would "make these already shadowy markets even more opaque." Tyler Gellasch, president of Healthy Markets Association, said "compliance officers and regulators will likely spend years asking how the risks grew so quickly." Situational Awareness has grown to 25 employees, including three focused on compliance, a firm representative said, and talks with Morgan Stanley over additional borrowing, stalled after the meltdown, have resumed.
According to The New York Times, Leopold Aschenbrenner founded the fund in 2024 without prior experience at an investment firm. The eight-person operation had only about half its staff dedicated to managing investments. Goldman Sachs, Bank of America and other major Wall Street banks nonetheless lent the firm tens of billions of dollars, enabling a concentrated position in AI-related stocks. The firm's executives reportedly pressed multiple lenders to raise leverage to ten times investor capital, up from four times, citing a banker familiar with the negotiations.
When AI stocks dropped sharply over the summer, the firm's lenders demanded repayment, forcing a distressed sale of roughly $20 billion in stocks to Citadel led by Ken Griffin, at a discount. The fund, which had grown to about $45 billion at its July peak, was left with around $10 billion in assets after the sale closed. Around that time, the Securities and Exchange Commission sent subpoenas to Goldman Sachs, JPMorgan Chase, Citigroup and Bank of America seeking information about their dealings with the firm.
Regulators have framed the episode as a broader warning. Frank Smets, who leads economic analysis and statistics at the Bank for International Settlements, said the near failure of an AI-focused hedge fund "served as another reminder of these risks," according to The New York Times, noting that heavily leveraged funds forced to sell could trigger a wider market selloff. The S&P 500 has logged 27 all-time closing highs this year and has returned 158 percent on a total-return basis since 2020, a rally the leverage has helped fuel.
The SEC has proposed easing some reporting rules requiring hedge funds to disclose borrowing levels to regulators. Senator Elizabeth Warren, the top Democrat on the Senate Banking Committee, said the move would "make these already shadowy markets even more opaque." Tyler Gellasch, president of Healthy Markets Association, said "compliance officers and regulators will likely spend years asking how the risks grew so quickly." Situational Awareness has grown to 25 employees, including three focused on compliance, a firm representative said, and talks with Morgan Stanley over additional borrowing, stalled after the meltdown, have resumed.
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