Wall Street plays defense

Situational Awareness found itself in quite the situation last week when the hedge fund imploded. Yesterday, Bank of America CEO Brian Moynihan said the near collapse of the fund should serve as a wake-up call for markets awash in leverage. The comments suggest Wall Street’s biggest lenders are beginning to take a harder look at how much risk they’re willing to finance.

The risk reset

Situational Awareness may have grabbed headlines, but it wasn’t the only hedge fund that got caught in the recent tech stock selloff.

According to analytics firm PivotalPath, technology-, media- and telecommunications-focused equity hedge funds posted an “unprecedented” 10% loss in July, while multistrategy funds fell 2.3%—their fourth-worst month on record. Those figures don’t even include Situational Awareness’ 67% plunge, suggesting plenty of other funds quietly endured the same tech unwind.

The AI rally reversed its course last month as concerns over massive AI spending, coupled with a surprise Citadel note predicting a Fed rate hike, sent tech stocks tumbling. In fact, the Philadelphia Semiconductor Index plunged 21% in July, marking its worst month since 2008.

As a result, hedge funds have begun to dial back leverage and trim volatile tech bets. That could leave another group of investors to take the reins of the AI trade—and create even more volatility.

“If this assessment proves correct and the capacity of hedge funds to hold tech exposures is structurally reduced, the tech trade would become over the longer-term even more dependent on retail investors and thus more susceptible to the swings emanating from leveraged ETFs, retail option buying and retail margin accounts,” JPMorgan strategists recently wrote.

Back in the game

For Situational Awareness, its risk management apparently starts with a new nine-figure bet. After watching its assets shrink from roughly $45 billion to $10 billion in a matter of days, the fund has already committed another $400 million to an undisclosed private company, just weeks after investing $100 million in the same business.

Hey, if at first you don’t succeed, try, try again.—SY