Pick up a newspaper these days and you’re bound to read about the near collapse of Situational Awareness, a hedge fund launched in 2024 by the “Nostradamus of AI,” Leopold Aschenbrenner.
The Wall Street Journal and Financial Times recently contributed an epilogue: Citadel, the firm that purchased the bulk of Situational’s distressed portfolio, has liquidated most of what it bought.
And now? Citadel’s equity fund was up 14% in July.
Nostradamus indeed predicted the future – just not his.
It’s cliché to draw parallels to Long-Term Capital Management (LTCM), so I’ll largely refrain. But frequently lost in the narrative of that 1998 collapse is its human element – something Roger Lowenstein captures well in When Genius Failed. When LTCM attempted to clear its short volatility positions mid-crisis, an employee recalled, “‘There were only four or five dealers [of volatility]. And they refused to sell.’”
Elsewhere, Lowenstein drops the rhetorical hammer: “Why this sudden interest, if not to exploit Long-Term’s distress?” It was, all told, part of what an LTCM attorney labeled the “LTCM death trade.”
Lowenstein could have written the same about Situational Awareness, some thirty years on. As the Journal recently reported, “Rival traders said they paid attention to what [Situational] owned, so when those stocks took a dive, they surmised that [Situational] was in trouble.”
As its positions soured, an investor noted, “‘It felt like [Situational] was being hunted.’”
Situational’s Death Trade.
Dramatic? Maybe, maybe not. Recall Citadel, the buyer that negotiated roughly a 10 percent discount from Nostradamus.
In Econ 101, we tend to simplify market mechanics. We liken them to, say, apples sold at the local grocery store. But such a stylized example lacks interpersonal complexity: Tom Thumb cares not, at the margin, how much I have in my checking account when it prices its Honeycrisps.
Consider instead the market for a share of Apple. The counterparty can be everything.
Buyers and sellers often have wildly different strategies, holdings, constraints, liquidity runways, you name it. Those differences can coexist peacefully for years. But when dropped together in the arena, those same differences can become weapons. Tools to exploit distress. To hunt.
Those who boil the capital markets down to pure 1s and 0s do so at their peril. Not because their math doesn’t math, but because they omit the human element. The humanity.
Perhaps the inhumanity.