Situational Awareness' 439% Return Was the Warning

Summary

Bloomberg Opinion columnist Aaron Brown discusses the collapse of AI hedge fund Situational Awareness, arguing its 439% return was a warning of excessive risk-taking violating the Kelly criterion, not a triumph. He explains how proper risk management would have preserved gains and draws parallels to Archegos. Despite the blowup, Brown maintains a long-term bullish view on AI, calling the summer volatility normal and the sector's thesis intact for sensible investors.

• Aaron Brown explains the Kelly criterion from Bell Labs, showing there is a risk limit beyond which only bad outcomes increase.
• Situational Awareness's 439% return exceeded any reasonable risk limit, making a blowup inevitable.
• The fund likely lacked adequate risk management and focused only on expected returns, ignoring survival scenarios.
• Banks lending to the fund protected themselves by quickly selling to buyers like Citadel, which has best-in-class risk management.
• The collapse is not a canary for the AI trade; summer volatility was normal, and most long-term AI investors remain committed.
• Brown reveals he is an AI bull with considerable investments, confident the AI thesis remains valid when risk is managed sensibly.
• The discussion references South Korean retail levered ETFs and the Archegos blowup as examples of over-leverage lessons.