Situational Awareness, an eight-person hedge fund led by 24-year-old Leopold Aschenbrenner with no trading experience, received tens of billions in loans from major banks including Goldman Sachs and Bank of America despite minimal risk oversight and a split-time compliance officer based in Reno, Nev., and San Francisco. The fund's massive AI stock bet collapsed over summer, forcing a $20 billion stock sale to Citadel at a discount to repay lenders. Regulators warn this near-failure exposes systemic risks from unprecedented leverage: hedge funds borrowed nearly $3.7 trillion from banks by midyear—the highest in over a decade and triple pandemic-era levels—mostly to bet on rising stocks.

This leverage fueled the S&P 500's 27 record highs and 158% gain since 2020 but amplifies downturn risks, as forced selling can trigger broad market declines. Experts like Tyler Gellasch of Healthy Markets Association and Frank Smets of the Bank for International Settlements caution that highly leveraged funds may be forced to dump stocks rapidly, inciting mass sell-offs. Aschenbrenner, a German native and Columbia graduate fired by Open AI for alleged leaks, launched the fund in summer 2024 with no prior internship experience; only four of eight employees managed investments.