Shadenfreude, bubbles, and Situational Awareness

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Did Situational Awareness inflate the AI bubble?<br>Jul 30, 2026

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The internet (at least my little corner of it) is abuzz with the (seeming) implosion of Situational Awareness.<br>For those unfamiliar, Situational Awareness is (was?) a buzzy hedge fund that called the AI trade basically perfectly last summer. They rode that call to unbelievable returns; I think the reporting is they were up something like 500% in the first half of the year (and I don’t say 500% as a loose number to say they were up a lot; I believe the reporting is they were up literally almost 500%). However, as the AI and momentum trade have suffered a rough July, Situational Awareness appears to have been caught in the crosshairs. There were online rumors1 that they were down ~30% YTD, which would imply they drew down 85-90% from the peak (and in a very short time frame).<br>There’s plenty of reporting2 to do on the implosion of the fund, and there will be plenty of schadenfreude from people celebrating Situational Awareness’s (seeming?) demise…. and I’ll admit it’s hard not to have a little schadenfreude at someone in their mid-20s with no investing experience starting a fund and generating legendary returns3 and then imploding because they couldn’t manage risk.<br>But I’ll leave the reporting and schadenfreude to someone else. I wanted to talk about two intertwined angles to the Situational blowup that I can’t get out of my head: the opportunity (or lack thereof) angle, and the bubble / capital allocation angle.<br>Yet Another Value Blog is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

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Let’s start with the opportunity angle. As investors, there is nothing better than a forced seller for a very simple reason that is literally in the name: forced sellers are forced to sell at basically any price to someone who can give them liquidity. However, finding forced sellers is devilishly hard; sellers know that they’ll get destroyed if people realize they’re forced to sell, so they don’t exactly go around emailing everyone saying “we desperately need liquidity; we’ll take whatever you bid but you have to bid right now .”<br>Pretty much the only time you know there’s a forced seller on the other end is when it’s a big fund that’s getting margin called somewhat publicly. Unfortunately for us, Situational Awareness seems to have done a good job of keeping their liquidity problems private; if you look at some of their chunkier positions (SNDK, BE, NBIS), they were moving in lockstep over the past few days and had huge bounces today on the unwind news, so while the prices are down a little it’s hard to point to a massive dislocation.

That said, while the price dislocation in the past few days was reasonably contained given the level of blowup, a lot of these are still down massively over the past month or two. Even with today’s big pop, most of these are down 30-40% over the past month:

And it’s not just Situational driving that big sell off; a Goldman note apparently estimated there were 1.2m margin calls in South Korea over the past month, meaning a not insignificant percentage of the adult population got hit with a margin call (it works out to ~3% of the adult population, but if you assume that the average person trading on margin is overwhelmingly likely to be a male in their 20s or 30s, I think there’s a possibility that >10% of South Koreans in the target demographic got hit with margin calls).<br>So you’ve got a whole sector getting swamped by margin calls and forced sales. The trader in me sees that and thinks “o man, I’ve got to buy and be on the other side of that!” because there will be a big snap back once the margin calls are finished.<br>Maybe! But here’s where I think some history is interesting. What you have in Situational + the Korean margin calls is a giant sector unwind leading to liquidations. These types of setups are pretty rare; the last one of these I can remember was when Archegos blew up and took down the media space and some Chinese internet stocks with them.<br>If you had asked me on the heels of the Archegos implosion, I would have guessed that every one of the stocks Archegos had been forced out of was an opportunity. While Archegos was a little smaller than Situational is today, Archegos was much more concentrated in much smaller stocks. So Situational owned like 2-3% of stocks like NBIS and BE, while Archegos owned 10%+ of stocks like WBD and PSKY (then ViacomCBS and Discovery)…. and often more ownership on an effective float basis given large controlling shareholders! Anytime you have a 10%+ shareholder getting blown out of a stock, I’d guess there’s opportunity!<br>And I would have guessed wrong! Below is a chart of the majority of Archegos’s holdings when it blew up; you can see that not only did all of them fall precipitously when Archegos was liquidated...